Will Higher Fees Hurt Riverside’s Latest Fund-Raising?

Posted by Deal Journal @ WSJ.com, June 23, 2008, 9:34 am

Plans by Cleveland private-equity firm Riverside Co. to raise the carried-interest fee on its latest fund to 25% from 20% are causing some static on the fund-raising trail.
There are three or four past investors who will likely not re-up with the new fund, which aims to raise $900 million, several people familiar with the fund said. Stanford Management Co., which manages the endowment of Stanford University, is among them, these people said.
According to these people, Riverside said its past performance and large investment team–170 professionals across the globe–justified the increase. Riverside says on its Web site it has generated gross internal rates of return of over 50% on realized investments in North America and Europe. Riverside focuses on the lower middle market and invests in companies that have enterprise values of as much as $150 million.
According to public data from Oregon State Treasury, the 2000 Riverside Capital Appreciation Fund generated a net internal rate of return of 23.6% as of June 30. That is roughly in line with the 23.8% median return to limited partners from similar vintage funds, according to Cambridge Associates data, which is from the end of the year.
Despite the LP push back, Riverside Capital Appreciation Fund V LP is meeting with some interest. Fund V has had a first closing, one person said, declining to provide details on size. The City of Philadelphia Board of Pensions and Retirement, a new investor, has pledged $25 million to the fund.
The predecessor fund closed at $750 million in 2004.
Carried-interest fees of 25% and 30% remain rare among buyout firms. Only the best firms with the most loyal LP bases have been able to push through such a fee structure. Both Abry Partners LLC and Bain Capital LLC take 30% of their funds’ profits.