Home ListingSeptember 16, 2015

Private Equity Funds Cling to ‘2 & 20’ Fees

As pressure mounts on private equity general partners, data show bespoke mandates are the best way to eliminate high charges.

Reported by Featured Author

The vast majority of private equity funds still charge a 20% performance fee on top of “industry standard” annual management fees of 2% or more, research has shown.

Despite mounting pressure from institutional investors on private equity managers to reduce fees, Preqin’s research found that 85% of managers running commingled funds charged a 20% performance fee. In contrast, 48% of separate accounts had such a charge.

“General partners that adapt to the evolving fundraising environment will better meet the needs of limited partners and create long-term, mutually beneficial LP-GP relationships.”In addition, Preqin reported that 73% of buyout funds launched in 2014, 2015, or currently raising money had an annual management charge of 2% or more.

Nearly half (49%) of managers did not charge management fees on co-investments.

Nearly a third of investors quizzed by Preqin said they were concerned about the level of performance fees, while one-fifth said they were worried about the appropriateness of fee structures.

However, Selina Sy, senior manager at Preqin, argued “some progress” had been made by managers to address fee concerns.

“Far fewer investors are concerned about the level of management fees at present, and at the same time, the proportion of investors that believe their interests are aligned with those of managers has risen significantly,” Sy said.

Investors are increasingly seeking “alternative routes to private equity,” she added, putting the pressure on traditional fund structures.

“General partners [GP] that adapt to the evolving fundraising environment will better meet the needs of limited partners [LP] and create long-term, mutually beneficial LP-GP relationships,” Sy said.

Ted Eliopoulos, CIO of the California Public Employees’ Retirement System, led the charge last month when he gave details to the pension’s investment committee about plans to overhaul and simplify its private equity program.

“What is an appropriate management fee? What level of profit-sharing adequately recognizes a manager’s skill and expertise and also fairly compensates the limited partner for assuming the risk? These are questions that deserve renewed attention and consideration,” he said at a public meeting in August.

Eliopoulos’ remarks came hot on the heels of a letter from representatives of several US public pensions to Securities and Exchange Commission Chair Mary Jo White urging regulatory action on private equity charging practices.