PE rakes in record €45bn management fees

Research from Preqin suggests total assets under management worldwide have now hit the significant $3trn mark, which suggests global private equity funds have continued to grow total assets under management despite the economic crisis, increasing 9% over the course of 2011.

While some might say this news heralds the success of the asset class and the high regard it is held with by investors, there is an elephant in the room – fees.

If we assume that annual management fees are on average about 1.5%, then $3trn of assets under management generates $45bn of management fees for the industry globally. Again, it's an impressive number, but when LPs are increasingly looking for value for money from their fund managers, this becomes a worrying statistic.

The growth of global assets under management is slowing down, with the middle years of the last decade seeing by far the biggest growth in AUM at over 30% a year between 2004 and 2007. Given the ongoing economic troubles in the eurozone, the huge growth in private equity in emerging markets and expiring investment periods in funds, total AUM in Europe will decline, if indeed it is not already falling.

With this in mind, it seems the industry will not be able to rely on such massive annual management fee incomes to keep itself afloat. Falling AUM is not the only problem here either, many fund managers have sought to attract increasingly cautious LPs with substantial fee discounts, pushing down average fee levels and potentially causing LPs to expect lower fees across the board in future. One Continental mid-market GP recently told unquote": "We have come compromised as much as we can on our fees and terms. The model needs to change."

With overall takings from management fees set to decline, what does this mean for private equity fund managers? The industry is bound to shrink in size to compensate for this loss in revenues – indeed it already has with some GPs reducing head counts while others shut shop entirely. Others may reinvent themselves to focus on the smaller segments they cut their teeth on several funds ago, funds which ultimately went on to boast the market-beating returns Europe's mid-market was once so coveted for. Those GPs that remain may also need to achieve impressive returns, as the incentivised carry is where fund managers should be making their money.

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