The recovery of the credit market and a rise in private equity buyouts have driven a rise in average transaction and monitoring fees charged by private equity firms since 2009, according to a study by law firm Dechert and researcher Preqin.
A transaction fee is typically a one-off payment levied by a private equity firm on the completion of a buyout. The study, which looked mainly at US deals, found that average transaction fees for the years 2009 to 2010 were higher across all deal sizes than the average for 2005 to 2008.
In buyouts valued at less than $500 million, private equity firms charged an average transaction fee equal to 1.28% of the deal size in years 2009 to 2010. This was up from 1.21% in the previous period. For deals of more than $1 billion, the average transaction fee was 1.04% of the deal size in 2009-2010, up from 0.8%.
Monitoring fees, which private equity firms charge for ongoing advisory services, also increased in the 2009 to 2010 period.
“While transaction fee activity dipped during and immediately following the market crash, we believe the opening of the credit markets and the increase of private equity buyout activity in 2010 allowed private equity firms to increase transaction fees and improve fee performance,” said the report.
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