Private equity investors are using current financial market constraints on liquidity to negotiate favorable deals, as private equity general partners have watched the values of their portfolios fall profoundly. Efforts to attract additional investment haven't been easy, as potential limited partners are reluctant to make long commitments in an uncertain marketplace. This has given limited partners a stronger position from which to negotiate both fees and terms and conditions.
Limited partners are getting a leg up on the private equity funds in which they invest, signaling a change from the historical trend in which funds could push for aggressive compensation based on the returns they provide. In a poll conducted by Preqin, 43% of investors noted a power shift from fund to limited partner, with only 2% seeing a shift toward the general partner.
Among the changes to fund terms and conditions, pricing has been most prevalent; more than 60% of the investors polled noticed that the management fee rate had fallen. This comes after several years of management fee stability at approximately 2% per year. The mean management fee for buyout funds has fallen 20 basis points (funds currently in the market versus those closed most recently), and fees for venture funds fell 15 basis points, making these sectors the most heavily affected.
The largest funds have suffered most, with buyout funds managing $1 billion or more sustaining management fee drops of 25 basis points. This doesn't mean the smaller funds have been spared, however. Those with assets under management of $500 million and below saw their management fees, on average, fall under 2% for the first time.
