Private credit management fees are coming under pressure as the market has grown more competitive and attracted “big ticket” limited partners (LPs).
LPs are demanding fee reductions or even a cut of management fees in order for general partners (GPs) to clinch the deal, industry sources have told Alternative Credit Investor.
Over the past year, private credit has continued its shift into the mainstream, growing into an estimated $3tn (£2.2tn) market and drawing a new set of investors.
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Where specialist investors once dominated the space, today’s LP base increasingly includes major pension schemes and, in particular, insurance companies. Moody’s reported last year that US life insurers have expanded their commitments to private credit to account for around one-third of the sector’s $6tn (£4.4tn) in assets.
ACI understands that the larger and more complex fundraising environment has strengthened LPs’ bargaining power with managers, leading to tougher demands, especially on fees.
Some LPs are demanding a cut of the economics of the GP, including a share of management fees, a fundraising professional told ACI. Fee pressure is being driven both by heightened competition among managers and the growing clout of large institutional investors entering the market.
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“If you are going after a big-ticket allocation, it comes from conditions, and favourable terms and specific allocations,” another industry source said. “Big players need to accommodate for large LPs.”
Large LPs such as pension funds can write substantial cheques to GPs. But with that scale comes leverage prompting downward pressure on fees as investors deploy more capital.
Co-investments
From the LP perspective, lower fees remain a top priority. In private credit, this can be achieved either through direct negotiations with GPs or by pushing for co-investments to achieve a blended fee, ACI understands.
Some pension funds are increasingly seeking co-investments, which can come with reduced fees, no carried interest, or both.
However, some warn that this trend may not benefit LPs in the long-term. As more investors chase the same co-investment opportunities, competition may intensify, particularly in North America, where spreads have already been compressing sharply, industry sources told ACI. The risk is twofold, as co-investment supply is limited and GPs can afford to be more selective.
In the UK specifically, defined contribution (DC) funds are putting pressure on fees as they look to allocate to alternatives. This comes as many have signed up to the Mansion House Accord, which aims to encourage pension providers to allocate at least 10 per cent of schemes’ default funds to private markets.
“DC schemes are very cost conscious, especially master trusts because a lot of master trusts are sold at specific fees and they want to continue to do that,” said Joshun Sandhu, head of investment solutions and partnerships at Mobius Life. “So, in order to do that you need to keep manager fees as low as they can.
“What you will get from private markets managers is that they can’t charge DC schemes as much as they can other clients, but what the manager gets is a growing book of assets that will aggressively grow.”
Sandhu believes that managers will need to more flexible if they want to get into the UK DC space and will need to be competitive on fees.
