The Cost of Incentive Fees and Semiliquid Funds

In today’s convergence of private and public markets, investors face challenges in understanding the true costs associated with incentive fee structures in semiliquid funds. These fees, often poorly disclosed, materially impact investor returns. 

Private credit and semiliquid funds regularly impose fees difficult for investors to predict, particularly when these fees are tied to unrealized gains. This creates an environment where transparency is sparse, and the cost burden on investors increases. Incentive fees play a significant role in investor costs, often rivaling management fees and substantially increasing the total expense for investors. However, as prospectuses for semiliquid funds frequently exclude details about incentive fees, this action makes it hard for investors to fully understand the cost structure. This lack of clarity is especially concerning in private credit strategies, where incentive structures rely on minimal interest rates, allowing performance thresholds to be easily met.

Regulatory gaps exacerbate nonuniform disclosure practices, enabling fund managers to obscure acquired incentive fees and bypass meaningful comparisons between funds. 

To address these disparities, Morningstar has introduced a fee normalization methodology. This standardized approach helps create clearer comparisons across different fee models, supporting investors in making more informed decisions.

Download the report now to understand further on what these types of fees entail as private market investing evolves.