Home ListingSeptember 12, 2014

Private Equity Deals Collapsing Over Fee Disagreements

Research by Preqin shows a lack of alignment of interests through fee structures is a major barrier to private equity investment.

Reported by Featured Author

Nearly two-thirds of institutional investors have rejected private equity deals because of unfavourable terms, according to a survey by Preqin.

Investors have highlighted a lack of alignment of interests between asset owners and private equity managers as a key concern.

Preqin questioned 100 institutional investors over the summer and found that 61% had pulled out of deals in the past 12 months. More than a third—37%—of respondents disagreed or strongly disagreed that interests were aligned on both sides of the negotiating table.

More than half of respondents highlighted management fees—which are typically 2% of capital with additional performance charges—as the most important issue for private equity managers to address. Preqin said investors had been calling for more emphasis to be placed on performance fees. Investors also highlighted fees charged on uninvested capital as a sticking point for negotiations.

Christopher Elvin, head of private equity products at Preqin, said the average level of fees had reduced slightly in recent years, but “investors clearly still think there is more that can be done on this front”.

Further research from Preqin demonstrated that average private equity fund fees only reduce significantly for the very biggest portfolios: annual management charges ranged between 1.91% and 2% for funds up to $2.4 billion in size, but for funds larger than $2.5 billion the mean annual charge dropped to 1.63%.

“With the number of private equity funds in market competing for investor capital still at record levels of over 2,000 vehicles, it is important that fund managers structure their funds in a way that instantly appeals to investors,” Elvin said. “Given the high proportion of investors that have told Preqin they have rejected funds due to their terms and conditions, fund managers need to acknowledge the demands of their investors and be aware of the terms offered by their peers to ensure a successful fundraise.”

Several pension funds have taken steps to bring private equity capabilities in-house in recent years, including the Ontario Municipal Employees Retirement System (OMERS), which now manages 70% of its unlisted equity allocation within its own walls. Long-term cost saving is one of the main reasons for following this path, according to XTAL Strategies founder Massimiliano Saccone, quoted in CIO Europe in June.