Morningstar Report Sees Problems in Incentive Fee Structures in Some BDCs

A report by Morningstar looks at the incentive fees charged by semiliquid funds, particularly unlisted BDCs, and raises several issues that may help directors as they evaluate fees charged by similar products. The report points out, among other things, that inconsistent disclosure practices are common with incentive fee products; incentive fee structures can incentive manager risk taking; some funds may materially understate their fees; and cost comparisons can be difficult for everyday investors given the different disclosure practices and incentive fee structures. Using examples of real-life products, the report also argues that incentive fee structures can impose material costs on investors, often in similar magnitudes to management fees. The report points out that acquired fund fees and expenses “also have incentive fee issues, as the underlying funds' incentive fees are sometimes included in the AFFEs … depending on whether the underlying funds are public or private.”  The report concludes that incentive fee structures could be improved overall by making them more shareholder friendly and more transparent.

Click here to read the full Morningstar report.