None shall pass

A few years ago, talk of fees was all the rage within the infrastructure investment community, with limited partners (LPs) offering forceful, post-crisis arguments as to why they should be cut and general partners (GPs) mounting thoughtful and robust defences on the merits of adequate fee structures.

Nowadays, though, that discussion is pretty much dead and buried. In a nutshell, LPs carried the day and, except for an ever-diminishing number of exceptions, GPs have been forced to make significant reductions to fees charged.

The latest reminder of just how far the balance of power has shifted comes courtesy of International Public Partnerships (INPP) and its investment adviser, Amber Infrastructure – both offshoots of defunct Australian infrastructure investor Babcock & Brown.

In a statement released today, INPP says it will hold a vote next month to agree on a number of significant cuts to the fees charged by Amber to reflect “changing trends in the market and the views of shareholders”.

The headline changes include the abolition of Amber’s incentive fee (with the exception of the fee payable till June 30 2013); a lowering of the base management fees to 0.9 percent on the parts of the fund’s gross asset value (GAV) exceeding £1.5 billion (INPP’s GAV is currently hovering just under £1 billion); and exempting new money raised from fees until it is actually put to work.

At the heart of the proposed changes lies the “recent comment”, as INPP termed it in an earlier statement, on the circa £10 million (€12 million; $15 million) incentive fee that is due to be paid to Amber for the period between January 1 and June 30.

The problem is that, during that period, INPP underperformed many of its immediate competitors, returning 4.8 percent when the average return of its peer group was 8.1 percent. But Amber’s incentive fee was tied to a benchmark measuring the return of 15-year gilts plus 2.5 percent. And 15-year gilts, for the first six months of this year, have rarely yielded above 2.5 percent.

As recently as July 2, INPP’s board of directors, which shares personnel with Amber, was saying that “under the terms of the [agreement] a performance fee is due to Amber for the period January 1 to June 30 […] in the order of 1 percent to 1.25 percent of NAV [net asset value]”.

Now, however, INPP’s board says that “a clear message from both existing and prospective investors [on] the incentive fee and the possible impact this may have on some investors’ willingness to support future growth in the company” has changed its mind. And even though Amber will still receive an incentive fee for the first six months of the year, 60 percent of that fee will be paid in new shares.

INPP’s LPs also forced a further reduction to the base management fee Amber charged, although, to its credit, Amber had been steadily decreasing this fee over the years. Still, a look at the base management fee’s descending trajectory provides a clear reflection of changing market trends: from 1.59 percent in 2011, to 1.27 percent in 2012, to 1.0 percent presently, and, as of September, to 0.9 percent on the portion of GAV exceeding £1.5 billion.

The message from the fund’s LPs is unequivocal: from now on, every penny paid will have to be accounted for; there will be no captive fees tied to relatively lacklustre performance; no tolls on restive capital; and, as the fund grows in scale, the management fee will have to be adjusted so as not to become an automatic profit generator.

This is the new normal for long-lasting LP/GP relationships. Or as INPP put it, “a worthwhile quid pro quo”.