Institutions: Mgmt. Fees Need to Change

NEW YORK CITY—Management fees may have declined in recent years, but institutional investors appear to be more vocal about improving the fee structure than they were a year ago, Preqin says. That's especially true “given the low return environment of 2014,” according to a report from the alternative assets data firm, headquartered here and In London.

Sixty-eight percent of the investors Preqin interviewed recently—in private equity, hedge funds, real estate, infrastructure and private debt—said more needs to be done regarding the fees they pay on alternative assets fund investments. That compares to 45% who said the same thing a year earlier.

Additionally, when it comes to alignment of interests, investors put fees at the top of the list of areas that need improvement in all but one asset class, private debt. Within the private debt space, fees ran second to the amount managers commit to their own funds.

“While the fees paid by investors in alternative assets funds have long been a point of contention, the last few years have seen investors become ever more vociferous,” says Mark O'Hare, CEO of Preqin. “In the year that saw CalPERS announce it is withdrawing from the hedge fund asset class due to complexity and cost, it is unsurprising that institutional investors across the globe that Preqin spoke with at the end of last year named fees as the number one area where they are seeking improvement.”

However, O'Hare notes that managers have been making strides with regards to fees. “Preqin has seen the average management fees for alternative assets funds fall steadily over recent years, with average fees for hedge funds specifically approaching 1.5% compared to the perceived 2% industry standard,” he says. For private equity buyout funds, the mean management fee last year was 1.90% compared to 2.01% for 2007-vintage funds.

“But if managers are to continue to raise significant volumes of capital from investors keen to develop their alternative asset portfolios, they will need to be able to effectively justify the fees they charge to an increasingly demanding investor community,” says O'Hare. It's a community in which slightly more than 30% don't think their interests are aligned with those of fund managers, according to Preqin.

In the current low-return environment, investors' satisfaction with their alternative investments varies widely by asset class, Preqin says. Investors are the most satisfied with returns from real estate, with a third stating that performance exceeded expectations over the past year, compared to 7% stating that returns fell short of expectations. Accordingly, 79% of active investors in real estate plan to invest more capital in the asset class in 2015 than they did last year—a higher proportion than any other asset class can claims. None of the investors surveyed by Preqin plan to reduce their allocations to real estate this year.

Private equity investments have also fared well, with 17% of investors surveyed saying that returns exceeded their expectations and three-quarters believing investments met expectations. Less positive was the perception of hedge-fund performance last year, with 35% of investors believing that the funds' returns fell short of expectations. Those expectations may be higher when, as Preqin reported, hedge fund investors are more apt than those in any other asset class to allocate 20% or better of assets under management to these funds.