Politicians are sometimes urged to not let a crisis go to waste. And investors can turn tough times to their advantage: the market turmoil also provides them with a chance to push private equity firms to cut high management fees, argues Eversheds, the international law firm.

Investment big-hitters such as sovereign wealth funds, given their sheer size ($3.51 trillion as of 2010; source: Preqin), have been particularly vocal in demanding change to the traditional management fee level of around 2 per cent, Eversheds said.

“The thorny issue of ‘excessive management fees’ has been around for a little while now and with some of the mega leveraged buy-out funds it is not hard to see why. A 2 per cent annual management fee on a fund of €6 billion (around $8.27 billion) amounts to a very significant annual sum of €120,000,000 which, regardless of the size of the investment team, is likely to leave the general partner (GP) with significant surplus funds even after all of the overheads have been paid,” said Mark Spinner, partner at the firm.

“If you reckon on each GP having a minimum of two funds under management at the same time then the issue of surplus management fees is simply compounded,” he said.

Industry data bears out Evershed’s concerns. In July, Preqin, the research organisation, found that in a survey of investors, half (50 per cent) of limited partners in private equity felt there was a mismatch between their interests and the managers of funds over fees. Some 71 per cent of investors were thinking of switching managers this year and only 29 per cent of them wanted to stick with their existing managers.

“Traditionally the 2 per cent management fee was intended to fund the operating costs of the GP whilst investments were made, matured and exited. The real carrot was always the prospect of sharing 20 per cent of the capital gain, subject to a ‘hurdle’ that is ordinarily around 8 per cent, by way of carried interest. However as fund sizes have grown, the percentage management fee payable has remained remarkably constant, meaning significant sums are now payable by way of management fees which are not necessarily linked to the overhead structure which they were designed to support,” Spinner said.

“Whilst some investors are likely to find a 2 per cent management fee slightly rich, many will see it as a price worth paying to get access to the top quartile GP’s whose superior returns outweigh the fees and carried interest payable,” he continued.

"For the most part, however, I suspect that the 2/20 remuneration model (2 per cent management fee and 20 per cent carried interest), which has been pretty much market standard now for a number of years, will continue,” Spinner added.