EUROPE - Private equity fees have risen to unreasonable levels, according to ATP, Denmark's giant labour market supplementary fund, but the fund sees scope for negotiating them down in the future.

"The development you've seen over the last 10 years or so has been that the size of the funds - and in particular the large buyout funds - has, in some instances, increased tenfold," said Bjarne Graven Larsen, chief investment officer at the DKK445bn (€bn) fund.

Since management fees are calculated as a percentage of assets under management, these fees are five or 10 times higher than a decade ago, he told IPE.

"I don't think that's reasonable," he said. "I think it's too much and it would have been appropriate if the increase of the fund size had been followed by decreases in the size of the management fee."

But from now on, investors may well be able to drive these fees down, according to Graven Larsen: "It's not going to be easy but it will be easier to negotiate the fees lower."

ATP currently has DKK14bn invested in private equity so has found built-in management fees for the big private equity funds tend to be approximately 2% but can sometimes drop to 1.5%, he said.

Graven Larsen said ATP had tried to bargain over fees but, until recently, the high volume of money flowing into private equity funds had made this difficult.

"It has not really been possible to negotiate the fees with the good private equity firms," he said. "But with the markets different today, where the fund-raising process is not that easy, I think you are going to see changes in the attitude to the size of the management fees going forward."

Citing a research paper from Harvard University suggesting the biggest value for private equity firms came from the management fee and not the value of the carried interest, he argued remuneration should be more closely aligned with performance.

"I think it should be that the biggest value comes from the incentive of the carried interest," he said. "Today (PE managers) can become very wealthy regardless of the outcome, just due to the fact that they raise so much capital. That was not the way it was supposed to be."

He underlined, however, a performance-related reward structure was already available for most private equity funds.

"If you get a return above 8%, then 80% goes to shareholders and 20% to management. That part is fine as it gives us common interests and I think that's appropriate. But because of the size of the funds, you should see a reduction in the management fees going forward," he said.

Even though fees in the investment sector had reached what he considers to be unreasonable levels, Graven Larsen said there were still good reasons for ATP to include private equity in its investment mix.

"I still think there are many good private equity funds and it's still our job to get the highest possible return for our members. We have to look for the best return after fees," he said.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email