Report reveals that venture debt funds buck the trend
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The global private debt fund market has grown to a record 324 funds in market by the end of November 2017, seeking a combined U$153 billion in capital commitments.
Meanwhile, the management fees charged by 2017 vintage funds has fallen to a 10-year low of 1.5% (median) and 1.52% (mean); down from 1.75% and 1.76% respectively for 2016 vintage funds.
According to a report from market analysts at Preqin, it’s the fourth consecutive year that management fees have stayed the same or fallen. A larger number of direct lending funds has helped this downward trend.
“As the private debt market has grown over the past decade, it has become increasingly distinct from the private equity industry. One area in which this is evident is the management fees for private debt funds now sit far below the rates seen in their private equity counterparts,” explains Preqin’s head of private debt products Ryan Flanders.
“In particular, direct lending funds primarily account for this downwards pressure: the debt type typically draws lower fee rates than other, more labour-intensive fund types, and the proliferation of direct lending funds coming to market has increased competition and driven fund managers to lower their fees to distinguish themselves from their competitors,” he added.
The peak period for private debt fund management fees was 2013/14 when the median fee for vintage vehicles was 2% and the mean was 1.8%.
Not all fees are falling
While fees in the private debt fund market are generally lower, there are exceptions including venture debt funds. Their fees remain elevated at 2.3% (mean) and 2.5% (median) due to the higher level of labour required in their management.
“Among special situations and venture debt funds, median fees remain at 2.00% or higher, while mezzanine and distressed debt funds have fees significantly above those of direct lending vehicles. Additionally, fund managers which specialize in niche areas, or fund managers with a strong performance track record, are more able to resist downward fee pressure and to preserve higher rates while still attracting investor capital,” Flanders says.
Market outlook
The private debt fund market has 172 funds focused on North America, 77 focused on Europe, and 33 on Asia.
This dominance of North America is set to continue, Preqin says, due to the maturity of private debt in the region. Overall, the outlook for this burgeoning fund sector is positive with continued growth expected in 2018.
Meanwhile, the management fees charged by 2017 vintage funds has fallen to a 10-year low of 1.5% (median) and 1.52% (mean); down from 1.75% and 1.76% respectively for 2016 vintage funds.
According to a report from market analysts at Preqin, it’s the fourth consecutive year that management fees have stayed the same or fallen. A larger number of direct lending funds has helped this downward trend.
“As the private debt market has grown over the past decade, it has become increasingly distinct from the private equity industry. One area in which this is evident is the management fees for private debt funds now sit far below the rates seen in their private equity counterparts,” explains Preqin’s head of private debt products Ryan Flanders.
“In particular, direct lending funds primarily account for this downwards pressure: the debt type typically draws lower fee rates than other, more labour-intensive fund types, and the proliferation of direct lending funds coming to market has increased competition and driven fund managers to lower their fees to distinguish themselves from their competitors,” he added.
The peak period for private debt fund management fees was 2013/14 when the median fee for vintage vehicles was 2% and the mean was 1.8%.
Not all fees are falling
While fees in the private debt fund market are generally lower, there are exceptions including venture debt funds. Their fees remain elevated at 2.3% (mean) and 2.5% (median) due to the higher level of labour required in their management.
“Among special situations and venture debt funds, median fees remain at 2.00% or higher, while mezzanine and distressed debt funds have fees significantly above those of direct lending vehicles. Additionally, fund managers which specialize in niche areas, or fund managers with a strong performance track record, are more able to resist downward fee pressure and to preserve higher rates while still attracting investor capital,” Flanders says.
Market outlook
The private debt fund market has 172 funds focused on North America, 77 focused on Europe, and 33 on Asia.
This dominance of North America is set to continue, Preqin says, due to the maturity of private debt in the region. Overall, the outlook for this burgeoning fund sector is positive with continued growth expected in 2018.
