Sunday, May 9, 2010

PE Investors push for more favourable fees and terms, and get them

CalPERS persuaded Apollo Global Management, a large PE firm, to scrap $125m in fees over five years reports The Economist.  Highlights from the article:
  • CalPERS plans to bargain aggressively with other PE firms (known as “general partners”) to bring down fees and has urged other investors (“limited partners”) to do the same.
  • Institutional Limited Partners Association (ILPA), a network of institutional investors in PE, issued a set of best practices that general partners should consider accepting if they want limited partners’ business.
  • ILPA calls for greater transparency, more favourable contractual terms and more generous profit-sharing. 
  • PE firms have typically charged investors a 2% management fee, which is intended to cover the basic costs of running their business. Limited partners insist that management fees shouldn’t be a source of profit for general partners, and in some cases are demanding to sit down with them to find out what their real costs are. 
Overall, it is an interesting development that is bound to strengthen the hands of the limited partners.  Some of these, like lower management fees etc have started happening in India too.   It would be better if there are some regulatory guidelines, more specially insisting on a decent level of paid-up capital for the general partner (hopefully this would avoid the temptation to make more money out of management fee) and some form a link/correlation between actual expense and management fee.  The intention should be to align the interests of the GP with the LP.  If VC/PE business aims at long term capital appreciation, then the GP should also aim to make long term money (along-with the LP) instead of higher annual management fee which is delinked from actual expenses at the ground level.