Private Credit Titans Win the Incentive Fee Lottery
It’s too easy for managers to earn performance bonuses now that interest rates have risen.
If you can earn a 12% return for lending to companies, “what else do you want to do in life?” Steve Schwarzman, co-founder and chief executive officer of Blackstone, said in September.
Photographer: Chris Ratcliffe/BloombergThe $1.6 trillion private credit market is enjoying a “golden moment,” in the words of one Blackstone Inc. executive, as banks retreat from risky lending and investors flock to funds offering double-digit returns on corporate loans. But those jumping on the bandwagon shouldn’t forget private credit fees are very lucrative too. As this asset class goes mainstream and mints billionaires, investors — aka limited partners — should insist on lower costs, and oppose incentives that can reward managers for little effort.
From a fee perspective, private credit is a sweet gig. There’s a 1% to 2% asset-management fee1, plus a further take of around 15% of profit once a specified return threshold is exceeded, typically around 6%. Once that triggers, a “catchup” ensures the managers receive their share of the entire profit, not just the income in excess of the hurdle.