Monday, July 06, 2009

An End to Management Fees at Buy-Out Shops?

From, July 6, 2009:

With tight debt markets putting the squeeze on the ability of private equity firms to make investments and score profitable exits, the limited partners providing the dealmaking capital have begun pushing back on the fees they've doled out to LBO shops for decades. Squarely in their sights is the 2% management fee that has acted as as an industry benchmark. (Buyouts also typically take 20% of the profits when they sell portfolio companies as well.) Three of the largest limited partners in the world -- giant pension plan the California Public Employees' Retirement System; fund-of-funds AlpInvest Partners NV, Europe's largest backer of private equity; and HarbourVest Partners LLC -- are all pressing for a reduction or end to the fee, according to Bloomberg. With performance down across the board, LPs finally have some leverage of their own when it comes to the fee structure, and the management fee was likely the first to come up because it's paid whether or not the buyout fund turns a profit for its investors. Until now LBO firms have been fairly successful at keeping their fee structures intact, instead making concessions in other areas such as capital commitments. TPG Capital, Permira Advisers LLP and Bain Capital LLC have all allowed their LPs to reduce the size of their capital commitments in megafunds. (The Deal Pipeline subscribers can read the full story here.)And with many LPs facing their own cash crunch, they are increasingly looking to reduce their allocation to private equity. Mark A. Coleman of Laurus Transaction Advisors recently wrote in The Deal magazine about the importance of communicating with LPs on the performance of portfolio companies. He writes: The troubled banking industry and pressure on limited partners to rebalance their investment portfolios, specifically their allocations to private equity, have made it critical that private equity firms be more proactive about keeping these parties informed on how portfolio companies are faring. Many firms have even added senior operating personnel and functional specialists at the fund level to more closely monitor performance and provide on-call support for portfolio company executive teams -- with an overriding objective of preserving value.Additionally, with leveraged lending still tight as drum, private equity firms are finding it very difficult to get profitable exits from portfolio companies. Even worse, the recession has sent a record number of LBO-backed companies into bankruptcy as their debt loads weigh them down and prove expensive to refinance. - George White
See Bloomberg storySeeThe Deal Pipeline story (subscription required)
See The Deal magazine story - Finger on the Pulse
See Dealwatch on PE-backed bankruptcies
See Dealwatch on PE/VC fundraising

No comments: