A version of this article appeared in CNBC’s Inside Alts newsletter, a guide to the fast-growing world of alternative investments, from private equity and private credit to hedge funds and venture capital. Sign up to receive future editions, straight to your inbox.

Private equity firms that raised funds in 2025 charged the lowest average management fee rates ever recorded, continuing a multiyear downward trend.

Buyout funds of last year’s vintage asked investors to pay a mean rate of 1.61% of assets, according to data through June from Preqin, published in a December report. That’s well below the legacy 2% management fee that the industry has been known for since its inception.

There are a few reasons for this trend toward fee compression – and they’re not all dire. Of course, the industry has experienced a difficult few years of fundraising, requiring many managers to offer fee discounts to secure commitments. Even still, the industry raised $507 billion in aggregate capital across 856 funds during the first three quarters of 2025, which is expected to be essentially the same amount as 2024, when the final quarter of the year is tallied, according to Preqin.

In response to a difficult fundraising environment, managers have been consolidating and capital is increasingly going toward the biggest funds. Nearly 46% of the capital raised in 2025 was done so by the 10 largest funds, up from 34.5% in 2024, according to PitchBook.

The rise in prevalence of larger funds is also why fees are compressing. Funds seeking more than $1 billion contributed to dragging down the mean, while middle-market and newer, smaller firms charged closer to that 2% figure, Preqin data shows. Larger funds can spread fixed costs – such as compensation, compliance and technology – over a broader base. In other words, just because fee rates are lower doesn’t mean the fee dollars are.

“In the near-to-medium term, we expect private-equity fee compression to continue,” Preqin’s Brigid Connor wrote in the report. “We believe the biggest driver of this trend is growing fund sizes.”

However, Connor said it’s unclear whether fund sizes will grow large enough to the point where private equity fees fall to the levels of actively managed, public equity strategies.

Preqin doesn’t break out details about incentive fees, which are typically paid when assets are sold or taken public, as a proportion of the appreciation. However, so-called realizations have been muted over the last few years after an onslaught of buyouts during 2020 and 2021 created a sizable backlog. Higher rates have increased the cost of capital – a headwind for managers seeking to monetize assets at higher valuations than they paid for them.

That dynamic led to the challenging fundraising environment and also made it more difficult for managers to collect sizable incentive fees.

There’s a broad expectation that could change in 2026 – especially if there are several more rate cuts from the Federal Reserve – and the gap between buyers and sellers of assets continues to narrow.