Fees are a focus, even in good times

Few private market managers provide fee discounts for early and repeat investors, while credit managers often only provide breaks to those making commitments over a certain amount, Andrew Hedlund finds

Fundraising is an inherently arduous endeavour, involving flights to the other side of the world and back – only to do it again just weeks later – to try and persuade limited partners to write cheques for whatever fund may be in the market.

To boot, capital raising is down this year after a gangbusters 2017. But this does not mean a weak fundraising climate. More likely, it is reverting to the mean. Managers raised $159.3 billion in the first three quarters of 2017, compared with just $88.6 billion in the first nine months of 2018. The latter figure slightly outpaced the $82.5 billion collected over the same period in 2016.

The bottom line is, it’s still a good time to be a credit manager. Forty percent of LPs polled recently told Coller Capital that they plan to increase their allocations to private credit. That’s substantially more than the 8 percent that planned on decreasing their allocation to the asset class.

In addition, more LPs in Asia, North America and Europe told Coller that private debt had outperformed their expectations, as opposed to those who said the asset class’s returns weren’t what they hoped.

Still, private credit managers must provide a compelling reason for LPs to allocate money to alternative lenders’ various vehicles. One way to do that is with fee discounts for both early and repeat investors, which very few private markets asset managers do, according to sister publication pfm.

In a survey, pfm found that only 33 percent of respondents offered lower fees to limited partners participating in first closes, while only 22 percent of respondents provide breaks to those who re-up to a successor fund.

Those participating in the survey tilted heavily toward private equity firms, with 81 percent of respondents identifying themselves as an equity-based strategy or part of a diversified platform.

When drilling down on debt firms specifically, only 18 percent said they offer early-bird discounts, according to a survey released in November by Dechert and the Alternative Credit Council. Almost half (45 percent) offer lower fees to LPs that make a commitment over a certain size.

Incentivising LPs to make larger allocations with fee breaks is a smart strategy. However, depending on how flexible a manager’s policy may be, it could disadvantage investors unable to make nine-figure commitments.

As many of the larger, more sophisticated LPs have made their way into private credit, smaller LPs may be fertile hunting ground for cultivating new investors, rather than slugging it out with other managers for those already in the asset class.

Of course, smaller investors may not be able to write a cheque that would garner a fee discount. Allocations of a few million dollars don’t move the needle as much as the $50 million commitments others can make.

But there’s an old adage: a couple million here, a couple million there and pretty soon we’re talking about real money.

LPs have told PDI and made clear in surveys that fees aren’t necessarily top of mind – often track record and firm personnel are among the most important factors. But in a still relatively robust fundraising market, credit managers should pull all the levers necessary to draw LPs into their funds.

Alternative lenders often make a pitch that they have the best relationships in the business when it comes to originating and closing deals. The same is true for LPs: there’s the chance investors, no matter the size of their portfolio, can provide valuable introductions down the line.

It may seem a tall order, given that Europe consists of sovereign nations rather than an amalgamation of states like the US, but US LPs should be up to the task.