Monday, November 14, 2011

Private Equity Fee Whack-A-Mole

In this week's The Economist an interesting article observes how some private equity firms are responding to pricing pressure that's reducing their formerly-standard "2 and 20" fees.  The article is based on a November 2011 report by the Dechert LLP law firm and Preqin Ltd., an information service provider primarily to funds and fund investors.

The take-away is that various types of transaction fees and monitoring fees charged to portfolio companies by their private equity firm "keepers" have been increasing recently, on average, particularly after the 2008-2009 financial crisis.

The "keepers" also collect separate fees from a portfolio company undergoing a transaction subsequent to becoming a portfolio company, such as the sale of a company division or a debt financing or refinancing with an unaffiliated lender or lenders. 

It's reasonable for private equity firms to be compensated for their professionals' time and efforts, of course.  (Most transaction fees are charged based on "deal size"; monitoring fees are often based on the portfolio company's EBITDA.)  And so whether the fees paid are fair is mostly a question of degree.  And, importantly, how the fees are allocated between the private equity firm-affiliated general partner of the fund that owns some or all of the portfolio company and the fund's limited partners.  The report notes that of the private equity firms responding to the survey used to prepare the report, approximately 20% allocate "all or a significant portion" of collected fees to the private equity firm or its affiliate.  

Please click here for the article and here for the report.

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