Management fees and transparency remain top of mind for investors in 2019.

Roughly two-thirds of investors have sought greater transparency from their fund managers, and more than half feel they pay too much in fees, according to PERE’s Investor Perspectives survey.

Unsurprisingly, management fees were the most debated topic between investors and managers, according to the survey. More than 45 percent of respondents said it was a top-three issue, while 44 percent pointed to key-man provisions – or lack thereof – and 36 percent clashed over performance fees.

Overall, the survey highlights how private investors are concentrating their capital with fewer managers and expecting better terms in return.

“Since the financial crisis, [investors] have been more focused on fees than they were before,” Roger Singer, a New York-based fund formation attorney with Clifford Chance, says. “With the growth in size of funds, the management fees, for many managers, became a source of profit because the management fee was growing at a faster rate than the manager’s costs. Simply put, it doesn’t cost twice as much to run a fund that’s double the size.”

More than 65 percent of respondents say they requested more fee transparency within the past 12 months. Also, 63 percent agree that “fees charged by private equity funds are difficult to justify internally,” while only 2 percent strongly disagree with that statement.

Although some might argue that a billion-dollar fund comes with greater responsibilities than one half the size, many managers are reducing fees for large investors, PERE understands. However, questions remain about how that money is being spent.

Specifically, Singer says, many investors want to know if fees are being collected to pay for third-party services or to offset in-house costs.

“Paying a manager for the costs of its personnel comes with a different incentive than reimbursing costs from a third-party service provider, where the manager has no interest in those costs being inaccurate or too high,” he says.

Despite these sticking points, investors are inclined to remain loyal to their existing managers, with 45 percent saying they would make fresh commitments, compared with 30 percent that would not. Three-quarters of respondents plan to renew their commitments at the same amount or more. Roughly 40 percent prefer partnering with fund managers for direct investments, while 32 percent would rather invest in an existing general partner’s fund (see pages 16-18).

Managers have accommodated institutional investor demands for fee breaks and added disclosures, but the relationship between the two may be worse for wear. Constant haggling has led some fund managers to seek other sources of capital, Evan Hudson, a New York-based fund formation lawyer with Stroock & Stroock & Lavan, says.

“Because of that endless discussion about fees, some managers are looking more to the retail space,” Hudson says. “They’re looking to smaller, private clients to get a wider investment base and not rely so heavily on mega institutions like pension funds and sovereign wealth funds that bicker over every single economic term.”