Investors in private equity are increasing their control over terms and conditions, resulting in lower fees, according to research by Preqin.

The data firm found that two-thirds (67%) of clients reported having rejected investments due to unfavourable terms.

However, one-third (33%) of investors said they had seen an overall improvement of private equity terms in their favour in the past 12 months.

Four in five (79%) buyers agreed manager interests were aligned with those of clients, compared with 70% a year ago and 63% in 2014.

“The findings,” Preqin says in its report, “reveal that investors have increased their leverage over fund terms, and their negotiating power has grown significantly as [managers] are eager to secure institutional capital in a competitive fundraising environment.”

Private equity investor satisfaction with T&Cs. Source: Preqin

Source: Preqin

Investors in private equity are becoming gradually more satisfied about alignment of interests with fund managers.

The data firm found that buyout funds launched since the start of 2015 and those currently fundraising had an average management fee of 1.78%, while 84% had a performance fee of 20%.

However, Preqin warned managers that “misaligned interests … cannot be solved purely by lowering headline fees”.

Managers also need to demonstrate an ability to generate above-average returns and consider other aspects of contracts, Preqin said, including governance structures, performance fees and rebates.

Preqin’s research also reported a correlation between lower management fees and top-quartile performance.

“Across different fund sizes, top-quartile private capital funds consistently have low average management fees,” Preqin said.

This is particularly noticeable in smaller private capital funds, including real estate, infrastructure, debt and commodities funds.

Top-quartile funds with less than $50m (€47m) in assets charged an average 1.24% annual management fee, while third-quartile funds in the same size range charged 2.08% on average.

Funds with more than $1bn in assets charged broadly the same fees, Preqin found.

“At the same time,” Preqin said, “it appears that top-quartile private capital funds account for a greater proportion of those funds that charge higher carried interest rates, and which apply higher hurdle rates to their funds.”

More than half (56%) of funds with a high hurdle rate – defined as greater than 8% – were in the top or second quartile for performance, Preqin added, “as firms look to further align their interests with those of investors”.