Asia private equity not cutting fees like global peers-survey

Wed Apr 6, 2011 9:01pm EDT

* Large Asian funds not lowering fees below 2 pct to match global peers

* Asian funds ahead of global peers in fee offsets and distribution

By Stephen Aldred

HONG KONG, April 7 (Reuters) - Growing demand to invest in Asia means the region's private equity firms are not lowering their management fees, while their peers in the United States and Europe have cut them because of investor pressure, a new survey from Hong Kong-based Squadron Capital showed today.

Pension funds and other investors have been able to wield increasing pressure on private equity funds in Europe and the United States to cut fees since the financial meltdown, as buyout firms have found it increasingly difficult to raise fresh cash.

But in Asia, rising demand to invest and a limited supply of funds over $1 billion in size, which tend to attract larger institutional investors, means fees are still above an average of 2 percent a year, the Squadron survey reveals.

"It's a matter of supply and demand: demand from investors for Asian funds is growing and many institutional investors are more comfortable investing in larger, more established funds," said Squadron CEO David Pierce.

Preqin data shows that globally over 40 percent of funds charge less than 2 percent in fees a year, but in Asia over 80 percent of funds charge that much or more.

On larger funds though, the money such fees generate can be well above management costs, and falls short of standards suggested by the International Limited Partners Association (ILPA).

"Its not the percentage that's the issue from an investor's point of view. If it's a $2 billion fund, then 2 percent of that in itself is already $40 million of fees a year, and it is pretty unlikely that they have a cost base that is $40 million," said Squadron managing director Wen Tan in a telephone interview.

Squadron's second annual survey of Asia's emerging private equity markets has also begun to monitor "sweetheart deals," where private equity firms offer deals to some investors on management fees and "carry" the cut of profits they take.

"Currently 90 percent of GPs in the region are offering the standard fees and carry," said Tan, but he added that Squadron expects sweetheart deals to grow as firms in Asia find it tougher to raise funds like their global peers.

ABOVE GLOBAL AVERAGE

While Asia falls shorts of ILPA best practices overall, the survey shows the region ahead of its global peers in key areas like fee offsets and distribution.

Over 90 percent of the region's funds now offset fees they earn from additional activity like being board members of portfolio companies against their management fees. The global average is only 43 percent.

And a majority of Asia's funds also follow ILPA best practice, returning all of investors' money in a fund and a minimum profit before the private equity firm becomes eligible for its incentive payments.

(Editing by Jonathan Hopfner)

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