Very large funds already command marginally lower management fees than smaller funds. But do these results imply that LPs should be pushing harder to restore alignment?
Josh Lerner: “It certainly begs the question of why the economics of PE have been so sticky. We know that post-deregulation, there has been quite a dramatic drop in fees charged in the public markets, but any reductions in PE have been modest and have mostly been the result of co-investment and similar discounts offered to select LPs, rather than an adjustment in the list price of the funds. That naturally creates a temptation to grow and grow, and this research suggests that this might not be in the investor’s best interest.”
Luke Riela: “You do see a slight reduction in management fees with the larger funds. The difference tends to be fairly small, however, so it is not a hugely compelling component of a larger fund’s appeal. More significant is the fact that larger funds tend to offer more co-investment opportunities. That co-investment is typically awarded on a no-fee, no-carry basis, which can bring blended fees down significantly. We continue to believe, however, that for those with strong manager selection capabilities, small cap and mid-market players can generate alpha relative to larger funds with lower fees.”
