Private markets and active equity fees rise as market consolidation ends long term fee compression

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Asset management fees for private markets portfolios have risen following increasing demand for these asset classes, according to new data from LCP’s 2022 Investment Management Fees Survey.

The survey, which is the most comprehensive analysis of asset management fees in the UK, uncovers large discrepancies in fee movements, with ongoing compression of fee rates in core asset classes contrasting with sharp rises for in-demand fund types.

Private markets fees surge fuelled by rising demand

The survey found that on a £50m investment mandate, average fees across a number of private markets asset classes increased from 2019 when the research was last conducted. Long-lease real estate fee rates increased by 0.1% per annum, or £50k, and infrastructure funds saw increases of 0.08%, or £40k per annum.

Rising demand for certain asset classes may explain why these fees have increased, according to Matt Gibson, Investment Partner at LCP. “Pension schemes make up a significant cohort of institutional investors. As they mature, we’ve seen trustees de-risking their asset portfolios by moving away from equities and towards asset classes which are seen as lower risk sources of return and income generation, such as private direct lending, long lease property and infrastructure.”

Fee consolidation levelling off in core assets

Asset classes such as corporate bonds continued to see significant reductions in average management fees, compared to LCP’s 2019 survey. For a £50m investment mandate, the average global active corporate bond fee rate fell by an equivalent of £35k per annum from 2019. Asset-backed securities, and UK equity also saw reduced charges, down  0.06%, and 0.05% respectively.

Within other equity asset classes, many average fee rates were unchanged or increased slightly compared with the 2019 survey. Most notably, the average fee rate for global active equity funds increased 0.07%, equivalent to £35k per annum for a £50m mandate.

The report highlights a potential turning point in fee compression for institutions. Reporting requirements introduced in 2018 as a result of MIFID II in the UK and EU increased costs for investment managers, who are often now having to pay for third-party research on companies themselves.

“Consolidation is one way we’ve seen managers reducing costs”, said Gibson. “Recent mega-mergers have been a sign of this trend. As fewer managers compete to provide services to institutional investors, negotiating power is returning to investment managers, leading to a levelling-off of fee rate reductions.”

Fee spreads persist between institutional and private investors

For the first time, LCP’s survey compared fee rates paid by institutional investors with those paid by individuals. Using data from two leading retail investment platforms, the survey compared the fee rates charged by the funds themselves.

The survey found that individual investors continue to pay notably more than institutions. In a sample of 49 specific funds available to both individual and institutional investors, 92% cost more for individuals than institutions, with the average fees available via platforms higher across all asset classes.

Total ongoing charges were 0.2% per annum higher on average for a global active equity mandate and 0.4% higher on average for a multi-asset mandate.

“While unsurprising, we question if there is a role for the platforms in tackling this discrepancy”, said Gibson. “Institutions, consultants and fiduciary managers have gained scale by negotiating fee rates on behalf of clients. Our survey raises the question of why platforms don’t do a similar job of negotiating fee rates for individual investors.”