Blackstone infrastructure fund eschews PE-style fees(4)

The firm will charge LPs in Blackstone Infrastructure Partners a 15% carried interest – an arrangement which clashes with the more conventional ‘2 and 20’ approach the firm has used for its other alternative investment funds to date.

The Blackstone Group, one of the world’s largest private equity firms, will eschew the conventional private equity-style fee structure for its infrastructure investments, InfrastructureInvestor has learned.

The firm will charge limited partners in Blackstone Infrastructure Partners, its debut closed-end infrastructure fund targeting between $2 billion and $3 billion, an outperformance, or carried interest fee, of 15 percent over an 8 percent return hurdle, according to a source familiar with the fund. It will also charge a management fee of 1.5 percent for fund commitments under $250 million and 1 percent for commitments under $250 million, according to the source.

Blackstone declined to comment.

To date, the firm’s alternative investment funds, including private equity and real estate vehicles, have featured more conventional fee structures typical of private equity firms. While management fees have typically hovered between 1.5 percent and 2 percent, carried interest rarely strays from 20 percent for private equity funds.

In infrastructure, however, private equity-style fee structures have stirred controversy, as many large pensions plans – traditionally viewed as sure sources of capital for this growing asset class due to their asset-liability matching needs – have pushed back on the so-called “2 and 20” private equity fee model for infrastructure investments.

Last month, for example, representatives from about $1 trillion worth of pension and institutional investment plans met at Stanford University to discuss, among other things, alternatives to paying private-equity style fees for infrastructure investments. Many of them favoured investing in infrastructure directly to avoid such fees, according to multiple individuals present at the meeting.

In response to such pressures, some alternative investment managers already in the market have begun to market their infrastructure funds with lower fee structures. Earlier this year, InfrastructureInvestor broke the news that private equity heavyweight Kohlberg Kravis Roberts (KKR) is charging investors in its debut $4 billion infrastructure fund a management fee of 1 percent and a carried interest fee of 10 percent.

KKR will assess the management fee on the fund’s net asset value (NAV) and unused commitments during the investment period and on only on NAV after the investment period.  A source familiar with the KKR effort, however, notes that the terms surrounding its 10 percent “carry” allow the firm to take payments based on unrealised asset value increases.

Blackstone’s infrastructure fee terms are being marketed in an environment in which LPs are generally looking for lower-cost ways to invest in alternatives. In June, the $187 billion California Public

Employees’ Retirement System, the largest public pension in the country, said that it would negotiate with private equity firms for fee reductions on all new commitments. The practice follows a policy the pension implemented in March to negotiate fee reductions with hedge funds.

Many private equity firms have also been cutting back their fees. In January, mega-buyout firm TPG sent a letter to its limited partners saying that it would allow them to reduce their commitments by as much as 10 percent and cut its annual management fees by one-tenth, regardless of whether the LPs cut commitments.

David Snow contributed reporting to this article.