Big investors push private credit managers to lower fees amid market maturation

Private credit managers are facing mounting pressure to cut fees as the asset class matures and larger, “big-ticket” limited partners exert greater leverage in fundraising negotiations, according to reporting by Alternative Credit Investor.

Industry sources told Alternative Credit Investor that LPs are increasingly demanding fee reductions or even a share of management fees as a condition for allocating capital. Over the past year the private credit market has continued its shift into the mainstream and is now estimated at roughly $3tn (£2.2tn), drawing new investors beyond specialist creditors to major pension schemes and insurance companies. According to Moody’s, US life insurers have expanded commitments to private credit to account for around one-third of the sector’s $6tn (£4.4tn) in assets, a change that has strengthened large LPs’ bargaining power.

“If you are going after a big-ticket allocation, it comes from conditions, and favourable terms and specific allocations,” one industry source told Alternative Credit Investor. “Big players need to accommodate for large LPs.” Another fundraising professional told the publication some LPs are seeking “a cut of the economics of the GP, including a share of management fees.”

The trend is not confined to the United States. In the UK, defined contribution schemes and master trusts, many of which have signed up to the Mansion House Accord to increase allocations to private markets, are putting intense pressure on managers to offer lower fee schedules. “DC schemes are very cost conscious, especially master trusts because a lot of master trusts are sold at specific fees and they want to continue to do that,” Joshun Sandhu, head of investment solutions and partnerships at Mobius Life, told Alternative Credit Investor. He added: “So, in order to do that you need to keep manager fees as low as they can. What you will get from private markets managers is that they can’t charge DC schemes as much as they can other clients, but what the manager gets is a growing book of assets that will aggressively grow.”

LPs are using two main levers to reduce fee burdens. Some negotiate lower headline management fees; others press for co-investments that either carry reduced fees or waive carried interest. But several industry participants cautioned that co-investments may not remain a panacea for LPs: as more investors seek the same co-investment opportunities, supply could tighten and competition, especially in North America, may push spreads and returns lower while allowing select GPs to be more choosy.

The broader private markets fee environment provides a mixed picture. Preqin’s Private Capital Fund Terms Advisor report, cited in industry briefings, shows management fees across private equity, private debt and real estate have been pushed toward the low end of their 20-year ranges amid fundraising pressures. Preqin and other observers say fundraising fell from peaks in 2021, reducing managers’ bargaining leverage and prompting concessions on fees and terms. Similarly, reporting by Transacted noted private equity management fees hit a 20-year low, averaging 1.74% of committed capital, reflecting a shift away from the traditional “2 and 20” model as managers face more intense competition for commitments.

Yet not all data points point to universal fee compression. LCP’s 2022 Investment Management Fees Survey found that some private markets fee rates rose on a typical £50m mandate, withcreases in areas such as long-lease real estate and infrastructure attributed to pension schemes reallocating from equities into income-generating private assets. Institutional Investor has reported that many allocators are still waiting for widespread fee breaks, noting that reductions have been modest or uneven across strategies; Preqin and private markets newsletters have also observed that specialised credit strategies, because of their operational complexity, can justify premium fees relative to more commoditised strategies.

Fund managers are therefore navigating a bifurcated market. On the one hand, larger institutional LPs and cost-sensitive DC schemes are extracting concessions and seeking structural changes, co-investments, hybrid vehicles with periodic liquidity, or enhanced reporting, to lower effective fees and increase alignment. Private Markets Alert and other industry observers report an uptick in fund structures offering periodic redemption rights and improved transparency as managers attempt to meet LP demands. On the other hand, managers with niche expertise or specialised operational capabilities argue that fee levels still reflect value delivered and the complexity of underwriting private credit exposures.

For GPs, the calculus is evolving. Accepting lower fees or sharing economics with large LPs can secure sizeable allocations and a growing, stable pool of assets under management. But industry sources warn that the long-term economics of such concessions are uncertain if competition for co-investments intensifies or if fee reductions become the default rather than the exception. As Alternative Credit Investor puts it, the growing clout of large institutional investors and heightened competition among managers “has strengthened LPs’ bargaining power with managers, leading to tougher demands, especially on fees.”

The coming months are likely to test how far managers will go to accommodate large allocations while preserving viable economics. Industry data and surveys suggest fee pressure is real but uneven: some private markets segments may see continued compression, while other specialisms could maintain premium pricing on the basis of complexity, track record or scarcity of supply. Managers that combine competitive pricing, clearer liquidity structures and enhanced transparency may be best placed to secure mandates from the expanding cohort of large institutional LPs now moving decisively into private credit.