Have you ever wondered what happens when an industry famous for its “2 and 20” fee structure starts breaking its own rules? It’s a bit like watching a luxury brand suddenly go on sale – intriguing, a little unsettling, and definitely worth paying attention to.
In 2025, something remarkable happened in the world of private equity. The average management fee charged by newly raised funds dipped to an all-time low. We’re talking about rates that have slipped well below the traditional benchmark that has defined the asset class for decades. It’s a shift that raises all sorts of questions about where the industry is heading.
The Decline of the Classic 2% Management Fee
For years, private equity has been synonymous with a straightforward fee model: 2% annual management fee on committed capital, plus 20% carried interest on profits. It was almost an unwritten rule. But recent data shows that rule is being rewritten.
Funds closed in 2025 charged investors an average management fee of just 1.61%. That’s not a minor dip – it’s a meaningful departure from the legacy standard. In my view, this isn’t just a blip on the radar. It reflects deeper changes in how capital flows through private markets.
Why Are Fees Falling?
Several forces are converging to push fees lower. First, fundraising hasn’t been easy lately. Limited partners – those big institutions and wealthy individuals committing capital – have become more selective. They’ve got options, and they’re using that leverage to negotiate better terms.
But it’s not all about desperation. There’s a structural shift happening too. Money is increasingly concentrating in the hands of the largest managers. When a handful of mega-funds scoop up nearly half of all capital raised in a year, it naturally pulls the average fee rate downward.
The biggest driver of this trend is growing fund sizes.
– Industry analyst report
Larger funds have economies of scale that smaller ones simply can’t match. Fixed costs like compliance, technology infrastructure, and talent don’t rise proportionally with assets under management. So even with lower percentage fees, the actual dollars collected can still be substantial – sometimes more than what mid-sized firms earn at higher rates.
The Rise of Mega-Funds
Let’s talk numbers for a moment. In 2025, the ten largest funds captured close to 46% of total capital raised. That’s a significant jump from the previous year. This concentration isn’t new, but it’s accelerating.
Why does this matter for fees? Simple. Funds targeting over a billion dollars – often much more – tend to offer lower management rates. They can afford to. Meanwhile, middle-market players and emerging managers still hover closer to the traditional 2% mark.
I’ve found that this bifurcation creates an interesting dynamic. Top-tier firms with proven track records command premium access to deals and talent, justifying their scale. Newer or smaller managers fight harder for commitments, sometimes sticking closer to conventional pricing to signal quality.
- Mega-funds benefit from scale advantages
- Lower percentage fees but higher absolute revenue
- Greater bargaining power with service providers
- Ability to invest in sophisticated systems and teams
Fundraising Remains Resilient
Despite talk of a challenging environment, the industry isn’t exactly struggling for capital. Through the first three quarters of 2025, private equity funds raised over half a trillion dollars globally. Final numbers for the year are expected to land roughly in line with 2024.
That’s not explosive growth, but it’s stability in an uncertain world. Interest rates have been elevated, deal activity slowed, and exits became trickier. Yet limited partners continue allocating to the asset class. Perhaps they see the long-term potential, or maybe they’re locked into commitments made years ago.
Either way, the resilience suggests that fee compression isn’t necessarily a distress signal. It’s more like an evolution – the market maturing and becoming more efficient.
What About Performance Fees?
Management fees are only part of the story. The real money in private equity has traditionally come from carried interest – that 20% share of profits. Unfortunately for managers, realizations have been muted recently.
A wave of acquisitions during the low-rate years of 2020-2021 created a backlog of portfolio companies. Higher borrowing costs made exits more complicated. Sellers wanted peak valuations; buyers demanded discounts. The bid-ask spread widened, and deals stalled.
As a result, incentive fees have been harder to come by. Many managers have gone several years without meaningful distributions to their teams. That’s put pressure on the management fee revenue stream to cover operating costs.
Looking Ahead to 2026
There’s cautious optimism building for the coming year. If central banks continue easing monetary policy, borrowing costs could decline further. That might help narrow valuation gaps and unlock more exit opportunities.
More realizations would mean more carried interest flowing to managers. It could also free up dry powder for new commitments. In turn, fundraising might become less competitive, potentially slowing the pace of fee compression.
Or not. Some analysts believe the trend toward larger funds is structural, not cyclical. If that’s true, lower average fees could become the new normal – even as total industry revenue grows.
In the near-to-medium term, we expect private-equity fee compression to continue.
Implications for Investors
Lower management fees sound great for limited partners, right? On the surface, yes. Every basis point saved compounds over a fund’s life. But the picture is more nuanced.
Capital concentration means fewer managers getting the lion’s share. Emerging firms struggle to raise funds, reducing choice and potentially innovation. There’s also the question of alignment – if management fees drop too low, do incentives shift in unhealthy ways?
Perhaps the most interesting aspect is how this affects net returns. Gross performance matters, but fees eat into what investors actually pocket. A lower fee on a mediocre fund might still underperform a higher-fee vehicle from a top manager.
- Evaluate total fee burden, not just management rate
- Consider manager track record and strategy fit
- Assess concentration risks in portfolio allocation
- Monitor evolving market terms over time
Will Fees Ever Match Public Markets?
Active public equity strategies often charge well under 1%. Could private equity ever get there? Most observers doubt it. The illiquid nature of the asset class, longer holding periods, and operational intensity justify higher compensation.
Still, the gap is narrowing. As funds grow larger and processes become more institutionalized, some efficiencies from public markets could migrate over. But private equity’s value proposition – active ownership and transformation – requires hands-on resources.
In my experience watching these trends, the industry finds ways to adapt. Fee structures evolve, but the core economics tend to persist. Managers need to cover costs and reward talent. Investors want alignment and strong net returns. Somewhere in the middle lies the equilibrium.
Industry Consolidation Continues
One undeniable outcome of tougher fundraising is consolidation. Smaller or underperforming firms merge, get acquired, or wind down. Capital flows to established platforms with scale advantages.
This isn’t unique to private equity. Mature industries naturally consolidate. But the speed here feels notable. Brand name, track record, and operational infrastructure have become even more valuable differentiators.
For ambitious new managers, the barriers to entry keep rising. Raising a debut fund today requires exceptional credentials or a truly distinctive strategy. The days of spinning out with modest capital and building gradually feel increasingly rare.
Final Thoughts on a Shifting Landscape
The drop in average management fees to 1.61% tells a bigger story about private equity’s maturation. It’s becoming more institutional, more concentrated, and more price-sensitive. Yet the fundamental appeal remains: the potential to generate superior returns through active ownership.
Change brings both challenges and opportunities. Savvy investors who understand these dynamics can position themselves advantageously. Managers who adapt thoughtfully will continue thriving. Those resistant to evolution might find the market less forgiving.
One thing seems clear: the old certainties are giving way to new realities. Watching how this plays out over the next few years should be fascinating. The private equity industry has always been dynamic – and it appears determined to stay that way.
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