Increased competition, speedier transactions and market maturation are among the factors impacting fees advisors earn when brokering fund stake sales.
A story we recently wrote regarding how much one advisory firm could get paid in its work to sell a large LP stake portfolio this fall indicated how fees in the advisory industry have fallen in recent years, in some cases to a single digit.
Ten years ago, secondaries brokers used to be paid as much as 200 basis points for working on a portfolio sale of fund interests, according to the managing director of one advisory and placement firm. But that was when the secondaries market was still very nascent and much less efficient than it is today.
Fees related to these types of stake sales have dropped dramatically in the last decade – they average around 20 to 30 basis points today for most deals, sources say.
That’s not the case, however, with all deal types; most of the sources I spoke with noted fees on restructuring deals, for example, were still in the triple digits.
“People are building out their restructuring practices, but they’re all fairly new at that,” a New York-based secondaries buyer said. “Every advisory [firm] has a very different process depending what they communicate to LPs, whether there’s a tender process etc… We’re still in the first inning of restructurings, so they can charge 100 to 200 basis points.”
So why have fees dropped so dramatically on deals that still comprise the bulk of secondaries market activity?
The first and perhaps most obvious reason is simply more competition as the market expands and matures. Previously the purview of a few specialist groups and investment banks, the secondaries advisory community has had an influx of new entrants, in the form of both independent shops like Cebile Capital as well as larger financial services firms building out a new business line, like Evercore or Tullett Prebon. Those are just a few examples; there are many more, including an array of online platforms now aiming to match up buyers and sellers.
“There’s been a compression of fees because of competition but also because of the growth of the market,” said a London-based advisor. “In a growing market, you get more scale, everything is getting cheaper.”
That said, not all portfolio sales are priced similarly – complexity matters. “Some transactions require more senior resources, some more junior resources. Some have a higher degree of risk. There’s a lot of factors coming into the fees,” the European advisor said.
The buyer added that pressure on fees has also been due to the fact that some sellers feel they can tap the secondaries market without the help of an advisor.
“Some LPs, like public pension funds, have to use an intermediary, because of their mandate, but endowments or non-public pension plans can call secondaries players and get a price,” he said. “It’s become more standardised.”
This also speaks to advisors perhaps needing to give some LPs better terms to win business and maintain strategic relationships.
Whether or not the drop in fees for portfolio sales actually matters, however, isn’t as straightforward.
Another broker based in New York, for example, agreed these types of fees had come down but maintained that the advisory business wasn’t necessarily any less profitable and was handling much more volume. “The nature of the business has changed too,” he said. “Transactions are closing much faster. The actual amount of work needed is much lower.”
And at the same time, many advisors are increasingly active with restructurings and other deal types that do take more heavy lifting and command higher fees.
What’s your view? Are fees set to drop further still, perhaps discouraging additional entrants in the secondaries advisory business? Get in touch at firstname.lastname@example.org