Mandate fees should be structured around a three-to-seven year ‘lock-up’, with cost-recovery only paid to the manager, but the performance fee component held back until the expiry of the lockup, according to FuturePlus CIO Michael Block. This performance fee would then be paid (or not paid) according to the long-term performance achieved against the agreed benchmark. Speaking at the 2010 Fiduciary Investors’ Symposium, Block acknowledged there are cases where the fixed-percentage fee model had been tweaked.
Most commonly, a slightly lower percentage-based fee was combined with a “performance fee”, generally 20 per cent of the outperformance of an agreed benchmark. However, Block pointed out that this incentivised managers to “go for broke” and take risks they otherwise would not, to try and enlarge their performance fee income – particularly if the arrangement was assymetrical and did not include clawback provisions. Another tweak, most often seen in the US, was the tiering of the percentage fee, so it became progressively lower the more a particular manager ran for a client. While this arrangement reduced cross-subsidisation, Block said its complexity added costs to the beneficiaries, and it did not address the incentive for managers to asset-gather, as the fees charged were still far less than the real cost of taking on additional FUM.
The rising popularity of private assets has made liquidity risk a growing concern for institutional investors, who need to carry enough liquidity for possible downturns, but avoid the opportunity cost of carrying too much, says Michelle Teng, vice president of the Institutional Advisory and Solutions group at PGIM.
Ben HurleyNovember 17, 2021
