General Partner Fees
Investors Pushing to Lower General Partners' Fees
Private equity general partners and limited partners have usually seen each other as equals, as a LP needs a GP to grow its capital and a GP needs an LP's capital for investments. However, the uncertainty of the market has shifted that balance of power in the limited partners' favor. Now, general partners are having a hard time attracting investors and limited partners are taking full advantage of their position. According to a survey conducted by Preqin Ltd., "43% of investors noted a power shift from fund to limited partner, with only 2% seeing a shift toward the general partner."Top quartile buyout firms have never had trouble finding investors and usually they have the privilege of dictating the deal by their terms. But now that buyout groups reported a 31% fall in the worth of their holdings last year, even the big buyouts are encountering resistance from their investors. The recent trend toward cutting general partners' management fees is a significant cut for buyouts. A 2007 study by University of Pennsylvania's Wharton School found that "Even before the LBO boom ended, firms earned almost twice as much from what they charged clients than from the gains they received from selling companies."
The industry has kept the average management fee at about 2% of assets under management for many years until 2008. Now, new private equity funds are charging closer to 1.8% and funds managing more than $1 billion are likely to charge just 1.65%, according to Preqin. Buyout managers use these fees to pay for operating expenses and skim an additional 20% from any profits generated through the investments.
There is certainly a call for lower fees by investors throughout the buyout world, as a Coller Capital survey found, "four of every five investors in Europe and North America plan to request better terms over the next two year." Pension funds have seen the private equity investments in their portfolio lose value during the last two years and have led the push for limiting fees. The California Public Employees' Retirement System has seen the value of its holdings slide by about 29%. Pension funds could justify paying the traditional 2 and 20 fee structure when returns were strong but now they are questioning it.
“When returns are bad, people just stop giving funds money,” said Steven Kaplan, a professor at the University of Chicago Booth School of Business. “They’ll pay fees in the long run, but only to the good funds.”
The industry points to long-term performance to justify the compensation. In the five years ended Dec. 31, LBO funds generated annual returns of 25 percent, according to Preqin data. The Standard & Poor’s 500 Index fell 2.2 percent a year on average during the same period, including reinvested dividends, and the MSCI World Index was unchanged.
“There’s going to be much greater focus on justification of management fee levels,” said Joseph Dear, chief investment officer at Sacramento-based Calpers, in an interview last week at the Geneva conference.
Calpers has about 11.5 percent of its $184.6 billion under management in private equity funds. Returns from those investments with outside firms, including Blackstone and Carlyle, dropped to 5.8 percent in the 12 months ended June 2008 from 23.2 percent in the previous year.
Tags: Private equity general partner fees, general partner fees, partners fees, GP buyout fees, LBO fees, LBO expenses, LBO management fees, buyout fees, private equity fund management fees
Link to This Resource: General Partner Fees
http://privateequityblogger.com/2009/07/general-partner-fees.html
