March 3, 2010 / 4:30 PM / 10 years ago

Hedgies, private equity dance to investors' tune

LONDON (Reuters) - Investors with cash to deploy are calling the shots for private equity and hedge funds desperate to win back business, and only some of the top firms are now able to dictate terms again.

Funds are having to negotiate on the level of the lucrative fees that both industries were used to charging, or give clients so-called managed accounts that give them more control and greater visibility over their assets.

“If you have a relatively open chequebook and want to negotiate, you can probably achieve something,” George Anson, managing director of HarbourVest Partners, which runs more than $33 billion in funds of private equity funds, told the Reuters Hedge Fund and Private Equity Summit in London.

“I think we’ll see more people demand separate managed accounts,” he said. “One of the areas investors will pay a lot more attention to is (negotiating about) transaction fees.”

Investors pulled a net $330 billion from hedge funds over the year to June 2009, according to Hedge Fund Research, and while returns of 20 percent last year have helped attract back investors, fundraising is much tougher.

Just $13.8 billion net was invested into hedge funds during the fourth quarter of last year. Meanwhile, private equity fundraising hit a five-year low in 2009, according to data from consultancy Preqin, with the $246 billion raised down 61 percent on the previous year.

“The reality is investors have bigger clout, fundraising is more difficult for those funds that need to raise capital, and it ends up being a negotiation,” said Richard Wilson, partner at Apax and chairman of the European Venture Capital Association.

DEAD MODEL

Hedge funds and private equity have typically charged 2 percent annual management fees and 20 percent performance fees. While Hedge Fund Research shows fees are gradually on their way down, some feel buyout investors have not pushed hard enough for cuts in management fees.

“It’s a matter of permanent puzzlement to me that investors have never taken much of an interest in dealing with fees,” said Better Capital (BCAP.L) founder Jon Moulton.

“It may well be fair to say you need something like 1 and 3/4 percent to manage a 100 million fund, you do not need ten times the amount (of money) to manage a billion fund, let alone 100 times to manage a 10 billion fund.”

Both industries are also — often reluctantly — having to offer clients so-called ‘managed accounts’ — separate accounts where the client owns the assets, rather than units in a fund, and can therefore sell out whenever they wish.

Investors are particularly wary after many funds stopped them getting their money back during the credit crisis, citing highly illiquid markets, just when they wanted to sell most.

Many are also worried about a repeat of the $65 billion fraud by U.S. financier Bernard Madoff, and want greater visibility over what they actually own.

“Certain models are dead or have got substantially hurt, (such as the model of) ... one big fund, everybody comes into my fund, I’ve got 2 and 20 fees,” said Chris Chris Goekjian, chief investment officer at Cheyne Capital.

BIGGER SEEN AS BETTER

Nevertheless, some of the bigger funds that performed well during the crisis are finding it easier to attract new money and can often take client assets on their terms.

“If you’re Brevan Howard or Paul Tudor Jones, I don’t think you’re going to have trouble raising your marginal dollar,” said Cheyne’s Goekjian.

More than half of net inflows in the fourth quarter went to firms with more than $5 billion under management, according to Hedge Fund Research, as investors backed firms they perceived to be safer.

Apax’s Wilson said top-performing private equity firms would retain a strong position when talking to investors about fees.

“You will find the top quartile will have a more robust position vis-a-vis investors in negotiations, as opposed to the guys who are at the other end of the scale,” he said.

London-based hedge fund Toscafund, for instance, is able to turn away fund of funds investors — a luxury many hedge funds could only dream of.

“There are those who know they should not bother to ring me now,” said Martin Hughes, chief executive of the firm, which runs $2 billion in assets and which is seeing net inflows into its funds, helped by gains of more than 100 percent last year.

“(I’ve got) no interest at all. They were appalling. They come out at the bottom and come in at the top.”

Editing by Jon Loades-Carter

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