* Investors unhappy with private equity fund performances
* 87 pct investors would refuse to back firm over high fees
* Most investors expect management fees of 1.5 pct or lower
* Investors would back higher performance fees
By Simon Meads
LONDON, Aug 7 Emboldened by their success in
bringing down boardroom pay in Europe and the United States,
pension funds and other institutional investors are now
attacking the fees charged by the once-booming private equity
Private equity firms, which aim to buy and sell companies
for vast profits, rode the crest of a cheap credit wave in the
middle of the last decade, charging fees that make lavish banker
bonuses pale by comparison.
But the biggest buyout funds raised in 2006 have so far
yielded just under 3 percent each a year, data shows, well below
returns of at least 20 percent which the dealmakers had
persuaded investors they were able to deliver.
"A lot of investors are upset about the historic returns
from their funds and attacking fees is one of the ways they are
gaining retribution," said one private equity executive at a
leading firm, who asked not to be named.
Some big investors led the revolts over management pay at
shareholder meetings this year at a wide range of companies,
including Citi, UBS, Barclays, Air
France-KLM, advertising group WPP and British
Meanwhile private equity pay and the low taxation rates on
the partners' bonuses have come under the political spotlight as
a result of Bain Capital co-founder Mitt Romney's bid to become
the next president of the United States.
And institutional investors are piling on the pressure, with
high fees now a reason for not investing with a private equity
firm, said 87 percent of investors surveyed by publishing and
data group PEI.
Investors have already begun chipping away at the once
standard 2 percent annual management fee which they paid on the
capital they give to private equity firms to invest over the
duration of a 10-year fund, regardless of performance.
"To us the shoe really starts to hurt at 1.5 percent and we
are looking to pay less than that," said Katja Solvaara, a
portfolio manager at Finnish pension advisory group Ilmarinen.
The biggest investors, with hundreds of millions or even
billions to spend, often get a discount on the 2 percent fee,
and the average annual fee is in reality already closer to 1.5
percent, private equity investors and the firms themselves say.
That is also the maximum level that 69 percent of investors
think private equity managers should be charging for their
management fee, according to PEI research.
Private equity dealmakers are paid far better than their
deal-making peers at investment banks, because of the "2 and 20"
fee structure that the industry shares with hedge funds, and
that guarantees income regardless of performance.
A hypothetical 5 billion-euro ($6.15 billion) fund with 20
partners who double investors' money will have about 1 billion
euros to share - or $50 million each - because of a 20 percent
cut of the profits.
Should they miss the target, a 1.5 percent management fee
means the dealmakers still get 75 million euros a year for costs
TIME TO TALK
In comparison, a senior banker can expect to earn a fixed
salary of 350,000 pounds ($546,000), which the best can
supercharge through bonuses. For example some 238 senior
Barclays staff earned about 1.5 million pounds each on average
Having burned through the billions raised before the credit
crisis many private equity firms that raise new funds every four
or five years are back in the market asking for more money and
finding more than ever that investors want to discuss fees.
"Since the financial crisis, it's one of those rare windows
that come along. There's an opportunity for the pension funds,
insurers and others that provide wholesale capital into private
equity to sit down and look at these mechanisms," said Alan
Mackay, chief executive of private equity fund manager Hermes
There are also some signs that private equity houses are
yielding to such ideas.
James Coulter, the co-founder of U.S. private equity group
TPG, surprised many when he said that more than half the group's
investors thought the biggest of them should get a discount of
20 percent on the management fee, which could take a 1.5 percent
charge down to 1.2 percent.
And Bain Capital - with which Romney now no longer has any
involvement - is offering a range of fee options, including a
higher performance fee of up to 30 percent in return for lower
"That would be preferable because it really shows that they
believe that they can produce the top quartile returns and it's
not a management fee game," said Klaus Ruhne, partner at Danish
investor ATP Private Equity Partners.
Investors have already won a victory on the range of
additional fees that sprung up unchallenged in the boom years of
the last decade, when deals for food groups to drugs makers ran
into the tens of billions of dollars.
They won concessions on deal fees charged to companies for
being bought, on exit fees charged to list or sell companies and
on monitoring fees for private equity executives to sit as
directors on boards.
Those now flow back to investors, otherwise known as limited
partners (LPs), rather than lining the dealmaker's pockets.
"It is quite extraordinary that there has been so little
dispersion between types of fees and fee structures. That can
only go one way -- there will be different models over time,"
said Ilmarinen's Solvaara.