Private equity fees are fairest of any asset class despite SEC scrutiny
Private equity fees are among the fairest in the asset management industry and wholly transparent, and it is unlikely the Securities and Exchange Commission (SEC) will find any transgressions with the fee structure.
A speech in May 2014 by Andrew Bowden, director of the Office of Compliance Inspections and Examinations at the SEC, identified potential conflicts of interest between private equity firms and their investors over fees, expenses and portfolio company valuations. There are concerns at the SEC that some private equity shops are charging investors unfairly for expenses.
“Private equity fees are fair, in that the manager does not get paid until profits are actually realised. Unlike other asset classes, high-water marks are subject to an eight per-cent hurdle, which never changes meaning the investor gets the best deal,” said David Bailey, founder of Augentius, a London-based private equity fund administrator.
The SEC has recently been questioning private equity managers about their deals and fees dating all the way back to 2007. There is speculation the US regulator could clamp down on private equity fees following its announcement back in 2013 that it would be reviewing the fees and expenses’ policies at hedge funds amid concerns that travel and entertainment costs, which should be borne by the 2% management fee, were in fact being charged to end investors.
Since the SEC’s announcement, a number of investors have reportedly been questioning their private equity managers about fees and expenses. “The bulk of private equity managers adhere to best practices. In addition, the new managers, which are likely to be subject to the most scrutiny, are the ones who are taking best practices towards fees and expenses the most seriously. Otherwise, they would struggle to raise meaningful capital,” explained Bailey.
Despite this, private equity fees do continue to be a source of contention for some limited partners (LPs). A survey by data provider Preqin found management fees to be the top area of concern for investors when polled on issues surrounding fund terms and conditions. Fifty-six per-cent of investors believed the management fee at private equity managers needed to be changed. This was trailed at 29% by disquiet that general partners (GPs) did not invest enough of their net worth into their funds.
However, the bulk of investors (76%) told Preqin that LP and GP interests were firmly aligned, compared with 23% who felt the polar opposite. This is a marked improvement from previous years. In 2012, 67% of respondents said GP and LP interests were aligned, while this stood at a mere 47% in 2011.