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Investors' agitation about private equity fund management fees intensifies

Institutional investors are beginning to act more determinedly to address their longstanding irritation about the size of the management fees charged by private equity firms, according to a panel of speakers at an industry conference in Munich.

‘We are in an environment in which investors are no longer simply accepting the two per cent standard management fee,' said Christian Mayert, a director at Allianz Private Equity Partners.

‘If current estimates of the capital overhang are correct, that means limited partners are currently paying $4bn in fees on capital that is not productive. That can't go on,' he added.

Mayert also complained about the trend for managers to go out fundraising on an increasingly frequent basis. ‘If general partners are fundraising every three or so years, you get to a situation where many are managing three or four active funds at one time and they are receiving fees on all those funds.'

Wellcome Trust's Sandra Robertson agreed and warned that wounded investors were now aggrieved enough to want to strike back. ‘Limited partners are suffering right now. They are taking huge write-downs. GPs aren't suffering. They are making money without getting out of bed. That hurts.'

Standard Life's Peter Kellar said LPs' preparedness to act had also been reinforced by their growing expectations that returns would be lower over the next few years than they had been used to historically.

‘We all recognise that returns will not be as high as in the past. In that case, the management fees become harder to justify. My expectation is that we will see a downward movement on fees, especially for the larger funds,' Kellar said.

Fees have long been a discussion point for investors but the fact that LPs are now making clear in public that they are not prepared to accept the standard two per cent suggests that they are applying more pressure behind the scenes and attempting to effect change.

Their views found some sympathy with one of the most high profile figures in the industry. Alchemy Partners founder John Moulton predicted the downward pressure on equity returns would force a major rethink in the way funds remunerated themselves.

‘There will be change. If returns are going to be lower then the fees make no sense at all,' he said. ‘It doesn't cost an awful lot of money to run a fund.'

He told the audience that the private equity industry had not yet adjusted to the global deterioration in economic and financial conditions and would benefit from a less conspicuous affluence.

‘There are over 100 people in the UK in the private equity industry who earn in excess of 2 million pounds a year. Three of the four highest rents in London are paid by private equity firms,' he said to exemplify the extravagance of the industry.

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