US direct lending fees fall as funds seek international capital

Fees for some private debt funds are falling, but opaque and complex structures can make it difficult to examine trends in the industry, according to research by bFinance.

A report from the investor consultancy found that asset management fees for US direct lending funds have fallen over the past year.

The development follows a fall in fees for European direct lending funds in 2017, which bFinance said was due to the private debt asset class in the region evolving and becoming more mature. bFinance found that median management fees offered by US direct lending managers to international clients have fallen from 1.3 percent in 2016-17 to 1.0 percent in 2019.

The report suggests that US managers are increasingly seeking international diversification in their client base and are targeting European institutional investors, leading them to reduce their fees and bring them more in line with European rivals, which now charge a median management fee of 0.9 percent.

Carry rates for US funds also fell significantly, from 15 percent in 2016-17 to 10 percent in 2019, bringing them into line with European funds.

The trend for falling fees comes against a broader background of rising fees in alternative asset classes, including private equity, with bFinance noting that less mature sectors are seeing lower fees.

However, complex structures can make it challenging for investors to assess overall fee trends and make comparisons across markets. The report highlights the example of Australian real estate debt funds, which may not share upfront fees with their LPs. While their headline management fees are lower, the withholding of upfront fees may mean they are not, in reality, any cheaper for investors.

Overall, investors using private markets funds were least likely to see a decrease in fees over the past three years, with just 29 percent reporting fees have fallen compared with 53 percent in public equities and 41 percent in fixed income.

Private markets funds also saw the highest reported rate of increased fees, with 14 percent of investors seeing fees increase compared with 11 percent in equities and 10 percent in fixed income.