A group of influential US limited partners yesterday reiterated concerns over the classic 2-and-20 management fee and carry structures associated with private equity fund managers.
“A $2 billion fund with a 2-and-20 earns $400 million in fees over the life of the fund with no carry,” Harold Bradley, chief investment officer of the Ewing Marion Kauffman Foundation, told delegates at the Milken Institute's annual conference. “A $650 million fund has to return capital 3.1 times in order to earn the equivalent fees. We are feeding a fee machine without anything coming back in return.”
Joe Dear, chief investment officer of the California Public Employees' Retirement System, stressed the importance of alignment of interests with LPs. “Someone made the remark that with these large funds partners are buying Rembrandts with the management fees. I don't have any objection at all to paying a partner a lot of money … as long as we are all along on the ride with them and share in that gain over the long haul. It's what the system's about.”
Dear said private equity has an important place in an institutional portfolio and noted there is persistence in
Someone made the remark that with these large funds partners are buying Rembrandts with the management fees.
the skill of truly top quartile managers. “But part of what's different in this world now is there's more capital constraint than there has been before,” he said. “Managers who were automatically oversubscribed and essentially could dictate terms to limited partners are not in the same situation. So now is the time for limited partners to take advantage of that and begin conversations about alignment of interests that truly make sense for the long haul.”
Those “amicable” conversations are already taking place, Christopher Ailman, CIO of the California State Teachers' Retirement System, told PEO in an interview on the sidelines. Firms including TPG and HgCapital have recently reduced fees charged on various funds.
CalPERS will be working with other pension funds and LPs to lobby GPs on fees, Dear said. “There's always the tendency for [some LPs] to accept the terms of the manager [because] even with these crummy terms if you've got the right manager your investment returns will justify that and that's how we've excused this behaviour.” If limited partners can “stick together in enough numbers”, he said, they may be able to shift the power pendulum.