Institutional investors are beginning to demand fee reductions from their private equity managers, which go beyond a simple trimming of the headline management expense ratio (MER). MICHAEL BAILEY reports.

The tables have turned in the ongoing war over private equity fees, with potential investors now advancing fast on their weakened positions of 2006-07. A key battleground, according to Brad Young from private equity consultancy and fund-of-funds manager Altius Associates, are the ‘work fees’ charged to the underlying company involved in a private equity transaction. “These work fees might be director’s fees, if the [private equity] general partner takes a couple of board seats. Or the manager might convince a company to which it’s providing growth capital that it needs a strategic review, and by the way here are a couple of guys that can do that for you – for a fee of course,” Young says. Some limited partners are unaware their private equity manager is being paid in this way, and don’t ask that any of this remuneration be credited back to the net asset value of the fund.

Savvier limited partners have, in the past, received a 50 :50 split of the proceeds, however Young says that in the buyer’s market of private equity today, he has managed to negotiate up to an 80 per cent split of the work fees on behalf of Altius’ advisory clients. “We only want our managers getting paid when we get paid,” he says. “It’s harder to get alignment of interests in a private equity transaction today, where the pool of assets has grown larger to the point where it has itself become a revenue generator.” Even an 80:20 split in the investors’ favour falls short of the aspirational goal set out by the global body representing their interests, the Institutional Limited Partners Association (ILPA). The ILPA Private Equity Principles, released only months ago, state that: “All transaction, monitoring, directory, advisory, and exit fees charged by the general partner should accrue 100 per cent to the benefit of the fund.”

Another Altius partner, Catherine Mountjoy, said the ILPA website – www.ilpa.org – was becoming a tool to help “limited partners all get on the same page with each other”, and even begin to create a “true secondary market” for their private equity fund interests. She said the network was helping expose the “window dressing” of published management expense ratios, and bringing transparency and even standardisation of carry terms, commitment fees and ensuring incentives generally aligned with the long-term interests of limited partners. Based in Virginia, Altius has been a presence in Australia since 2007, when it became the advisor to the international private equity portfolio of the Australian Reward Investment Alliance (ARIA).

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