Increased allocations to private assets are pushing total fund fees and causing institutional investors to review their investment management partners’ fee packages, says Duncan Higgs, managing director and head of portfolio solutions at bfinance.
Underlying fees in alternative investment markets — such as carried interest and waterfall structures — are increasingly considered by investors dealing with general partners as part of the overall transaction costs, he says.
Read: Expert panel: Institutional investors should re-evaluate fees in ‘turbulent twenties’
“Lots of investors are focused on investment management fees, though more are realizing that you need to dig a lot deeper on broader fees and costs, especially when you’re thinking about reallocating to more opaque structures like in private markets.”
A new study from Callan found as more institutional investors shift toward private equity, private credit, real assets and hedge funds, the organizations are accepting higher fees in exchange for potential diversification and return benefits. It also found total investment management fees averaged 40 basis points across all investor types.
Institutional investors depend on a competitive process between investment managers to find the best service possible at an attractive cost, says Higgs, noting this competition is what gives investors a chance to know what true value is in the space. “You want investment managers to be competing against each other for access to capital.”
Read: Institutional investors paying up to 2% in private equity management fees: report
Higgs sees some momentum with investors looking to reduce their management fees or bring more activity in-house but warns at this level, it’s difficult to mandate a total fee reduction and instead tells organizations to gain a firm handle on all the fees being paid. Other underlying management fees include performance fees and transaction cost analysis.
“The downward push on fees also has to be balanced with outcomes, assessing investments from multiple angles is crucial.”
The needs of European institutions, which are more accountable for environmental, social and governance considerations due to codified regulation, reveal another factor in the pursuit of competitive management fees for investors. The rules around ESG are pushing investors to review investment strategies that might offer slightly less performance or even increased costs but that can service their impact needs, he says.
“Some investors approach investing not just with a performance objective but maybe a dual objective. They’re sometimes willing to pay more if they can access those managers who think they can deliver on both a financial as well as a secondary, non-financial, objective.”
Read: Report finds investment management fees for open-end real assets funds as high as 20%