AlpInvest’s Hacker: GPs push back on management fee offsets

  • AlpInvest’s Mike Hacker eyes strong LP interest in PE
  • March toward 100 pct fee offsets has slowed
  • Some GPs drop preferred return hurdles

A hot private equity fundraising market of about $300 billon expected this year has tilted the power toward high-performing GPs on fund economics, an executive at AlpInvestsaid.

Mike Hacker, managing director at AlpInvest, said the pace toward 100 percent management fee offsets has slowed as GPs push back.

Overall, GPs continue to capitalize on the “very large influx of capital” into the asset class from a number of sources, Hacker said.

“LPs have less leverage today,” Hacker said during his September 27 keynote address in front of about 200 attendees at PartnerConnect West 2016 at the Hotel Nikko in San Francisco. “We’ve had a lot of inroads from 10 years ago, but LPs were hoping to get 100 percent fee offsets by now. It’ll take the next market correction to make more progress on this.”

Hacker hasn’t seen GPs backtrack from 100 percent fee offsets to, say 50 percent fee offsets. Rather, some groups have had 50 percent fee offsets and may be going as high as 75 percent or 80 percent, but not all the way up to 100 percent, he said.

Another way GPs are pushing back on economics is through preferred return hurdles, which require a manager to guarantee a certain return on a fund before starting to collect carried interest. In one high profile example, Advent International dropped a preferred return in its latest flagship fundraise. Hacker did not mention any specific GP names in his remarks.

“We like to see GPs have preferred return in the GP carry waterfall,” Hacker said. “If the GP is in it to maximize carry for themselves and it’s not taking into account its LPs, that’s not a fund we want to take part in.”

To be sure, GPs who don’t offer first- or second-quartile returns continue to struggle in the fundraising market and don’t dictate terms as favorable as shops drawing larger LP interest, he said.

Asked about his specialty in the secondary market, Hacker said the business is only in the middle innings of its development.

“Most LPs weren’t thinking about it six or 10 years ago,” he said. “Today it’s a different ball game. If you’re not thinking about secondaries, you’re missing out on an important element of your portfolio management repertoire.”

AlpInvest takes part in a variety of secondary transactions including restructurings and spin-outs from older firms.

“It’s an interesting space and it’s changed,” Hacker said. “It was the Wild West in the early 2000s. Today, it’s a more standardized market. …But in terms of major secondary specialists, there aren’t many new entrants. It requires a lot of work and expertise so it has pretty interesting barriers of entry.”

Action Item: Read Mike Hacker’s profile here,