San Francisco consulting firm Callan in an analysis of fees and terms for 330 private credit partnerships found that terms have shifted since the emergence of the asset class after the Global Financial Crisis, with management fees and carry evolving from 2% and 20% to a median of 1.5% and 15%.
Callan reviewed fund offerings that were in the market in 2016 through the third quarter of 2022. The team said they have seen increases in tiered pricing depending on fund leverage and commitment amounts. First-close discounts also became increasingly popular. Limited partner pressure to increase preferred returns back to 8% is expected to continue in the rising interest rate environment, they added.
“Being able to evaluate a partnership’s terms compared to those of its peers is an especially useful tool when conducting due diligence,” said Catherine Beard, study author and senior vice president in Callan’s Alternatives Consulting group. “We also envision that general partners may find the study useful as a way to determine how their fees and terms compare to other managers.”
Interestingly back in 2021, when private equity allocations were surging Callan tracked rising fees in that asset class.
This is the first such study that Callan executives have conducted. By strategy, the dataset is weighted toward direct lending, which represents 62% of the partnerships reviewed. Opportunistic credit comprises the second largest component. Post-COVID, there has been a pickup in opportunistic credit and multi-strategy fund allocations, officials said.
- Direct lending strategies have the lowest fees as the fees are charged based on a larger capital base. Opportunistic, distressed, multi-strategy, and asset-based lending strategies had the highest median management fees.
- The majority of funds in the dataset had a European waterfall while just under a quarter had either an American, hybrid or other type of waterfall fee.
- The most common carried interest percentage was 15% with 36% of funds charging at that level.
Callan found that the median preferred returns were in the 6-7% range, which is down from 8% earlier in the lifecycle of private credit. The majority of funds used a compounded calculation for the preferred return.