Home > News > Manager Selection > Private Equity LPs Pay $2B a Year for 'Miscellaneous'
Manager Selection

Private Equity LPs Pay $2B a Year for 'Miscellaneous'

Researchers estimate transaction, monitoring, and other fees made up 4% of revenue over 20 years—and investors may not have tracked them.

Performance fees, or carried interest, may not be the only type of controversial private equity fees.

Private equity firms took home nearly $20 billion in transaction and monitoring fees, or 3.6% of all earnings, from some 600 acquired companies over the past two decades, according to academics. 

These fees are not well documented and are often overlooked by companies and limited partners (LP), argued University of Oxford’s Saïd Business School’s Ludovic Phalippou and Christian Rauch, and Frankfurt School of Finance & Management’s Marc Umber.

“These fees are contentious because they are charged by GPs [general partners] to companies whose board is controlled by these same GPs,” they wrote. “LPs negotiate only on management fees, carried interest, and the fraction of portfolio companies fees that is rebated against the management fees due.”

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According to the paper, these “portfolio companies fees” include not only transaction and monitoring fees, but also termination, director, commitment, financial advisory, and capital market fees. Even some business expenses such as the use of private jets are included in some deals, the authors said.

Specifically, the research found GPs took home $10 billion in transaction fees, $8.1 billion in monitoring fees, and about $1.5 billion in other fees from 1995 to 2013.

Furthermore, Phalippou, Rauch, and Umber said from 2008 to 2014, the largest four private equity managers (Carlyle, KKR, Blackstone, and Apollo) earned $16.5 billion of carried interest, $10.8 billion of management fees, and $2.5 billion in “net monitoring and transaction fees.”

The authors also applied these calculations to fees paid by the California Public Employees’ Retirement System (CalPERS), and said it would have paid $2.6 billion in portfolio company fees across funds with vintage years 1991 to 2008, “which they have not tracked so far.”

The $288 billion pension announced in November that it had paid $3.4 billion in performance fees for $24 billion in net gains since the private equity program’s inception in 1990.

“These fees are commonplace and are not a new phenomenon,” the authors wrote. “Even if these fees were to be 100% refunded to investors going forward, we note that the amounts charged are economically relevant and significantly impact the finances of a large number of corporations.”

Related: Investors Overpaying for Bad Private Equity Funds, Study Finds &CalPERS: $3.4B Fees, $24B Gains from Private Equity

Home > News > Asset Allocation > Hedge Fund Product Wave Set for 2016
Asset Allocation

Hedge Fund Product Wave Set for 2016

Get ready for marketers to come a-knocking as hedge fund firms prepare a bumper crop of new releases.

Almost half of all global hedge fund and liquid alternative managers are set to launch new products in 2016, research has shown, as funds claim rising assets indicate increased investor appetite. 

Some 44% of hedge fund firms told PwC and the Alternative Investment Management Association (AIMA) that they planned to market new funds, while a third of US and half of UK liquid alternative managers said the same.

“Identifying and targeting sales channels and targets was not systematic at many hedge funds until recently.”

“Going forward, considerable thought will be applied to each and every fund launch,” a report accompanying a survey by PwC and AIMA said. “As investors become more demanding and require greater customization, the research and business development activity before a fund launch will intensify.”

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Every product must be thoroughly vetted for potential performance, for attractiveness to the market and for potential profitability, the report continued.

“Identifying and targeting sales channels and targets was not systematic at many hedge funds until recently,” the report said. “Today, many have sophisticated processes to decide which investor channel or channels, and which markets and regulatory regimes, they want to target.”

PwC and AIMA found that expected sales targets were different around the world, with defined benefit pensions expected to take up the bulk of new products in the US next year. In continental Europe, high net worth individuals were the main target. In the UK, hedge funds-of-funds were expected to soak up much of the new products on offer.

The reason behind these new product launches has been a rise in assets across the industry, according to the survey.

More than half (61%) of managers reported rising assets in their funds, while upwards of 80% of firms offering liquid alternative products said the same.

“The alternatives industry continues to grow and evolve, a sign that it is responding positively to changed investor demands as well as regulatory reforms,” said Jack Inglis, AIMA CEO. “The industry, having begun the process of institutionalization prior to the global financial crisis, is now maturing rapidly in order to manage a variety of distribution opportunities.”

This month, a survey of institutional investors around the world reported that 41% would increase their hedge fund holdings in the coming year.

Related: Hacking a Hedge Fund

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