LPs: Fees must reflect strategy

The wide range of investment styles and strategies has yielded a number of options for investors when it comes to picking private debt or credit managers. That variety mirrors the assortment of management fee and fund term structures seen in the industry, said limited partners at Private Debt Investor’s Capital Structure Europe conference on Wednesday.

“What we in general want to see is fee structures that reflect the strategy,” said Verena Kempe of Feri Trust.  “On the low-yielding side, we want to see fees reduced.”

The limited partners participating on the panel seemed to reach the conclusion that certain strategies, such as distressed turnarounds and control investments, merit fund term structures in line with the 2 percent management fee, 20 percent carry that has become something of a market standard for private equity funds.

More passive strategies warrant more LP-friendly structures.  

“There are a number of funds out there now, on the senior lending side, where there is no carry being charged,” said Ajay Pathak of SJ Berwin. “Or being charged with a significant hurdle.”

Because private debt sector has only been in existence for a few years – or at least, that’s how long limited partners have set separate allocations – investors and GPs have yet to determine an industry standard for fees and terms. As investment strategies continue, it’s likely that certain fee structures become the norm for specific sub-strategies, said moderator David Waxman of Azla Advisors.

“We may end up with different fee structures for different market segments over time,” he said. 

“It’s all about the alignment of interest,” said Peter Mayrl of T&M Consulting. “In the end, all we have learned in the private equity space about carried interest can be applied to the private debt space.”