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Report: Private debt fees on the slide

Fees for private debt funds, especially in Europe, have compressed as competition in the space has increased.

Investors are paying lower median fees for private debt exposure, a new report from bfinance notes. Increased competition among private debt providers, as well as a ‘normalisation’ of pricing in the asset class, is behind the decline in costs.

According to the report entitled ‘Investment Management Fees: New Savings, New Challenges’, fees for European direct lending funds have dropped by more than 30 percent since the firm published its last report in 2015. The median management fee has dropped from 150 basis points to 100 basis points. The average carry percentage has also fallen from 15 percent to 10 percent. 

Behind the drop in costs to investors is increasing competition in the market. “There has been an increase in the number of managers in the space,” Dharmy Rai, associate at bfinance, told PDI.

This increased competition has taken two forms. Established debt fund managers have been dropping their fees to gain increased market share, according to Rai. Additionally, new entrants to the space have entered with lower fees due to a desire to gain traction immediately. 

 bfinance study chart

Also worth noting is the adjustment many managers have made in recent years in bringing their fees in-line with the returns from debt. “I think initially, when it started, there were similar fees to private equity,” Rai said. Structuring fees in this way, particularly the catch-up provision, may have been unsuited to the returns generated by private debt, she added. 

The report also noted there is great disparity between the fees attached to one debt fund and the next. In general, Rai noted, investors are willing to pay more for higher-risk strategies which have the possibility of higher returns. Sponsorless strategies also can command higher fees, with the understanding that more vigorous research is needed to deploy capital in these offerings.