Blackstone mixes discounts with higher management fee on Fund VII

The first close would bring the firm two-thirds of the way toward its $15 billion target and more than halfway toward its $17 billion hard cap, which would make it one of the industry’s largest funds in recent memory.

As Buyouts previously reported, one factor that has attracted LPs to Blackstone Capital Partners VII’s first close was a six month reprieve from management fees at the start of the fund’s investment period, which should help smooth the effects of the J-curve. Beyond the six-month fee break, however, Fund VII’s terms include a handful of interesting wrinkles, including several items that LP investment memos characterize as “not in line with market standards.”

LPs will pay management fees on top of their capital commitments, according to a Cambridge Associates memo made available by the San Francisco Employees’ Retirement System. Typically, management fees are included within fund commitments. In Blackstone VII’s case, San Francisco will owe the firm an annual management fee in addition to its actual commitment. 

Furthermore, the firm will use the fund to pay Blackstone’s operations group, which provides hands-on support to portfolio companies, according to the Cambridge memo. LPs would also be on the hook for payments to healthcare consultants and brokerage professionals, procurement or group purchasing expenses, and annual retainers paid to third parties. The fund caps these expenses at $20 million annually, with any overflow returning to investors as a management fee offset, according to the Cambridge memo.

In the past, Blackstone would charge those service fees to portfolio companies rather than the fund. While that kept LPs from having to pay for those services directly, Blackstone flagship funds’ offered considerably lower management fee offsets for services charged to portfolio companies. This is the first time Blackstone has offered flagship fund LPs a 100 percent management fee offset on transaction, monitoring or other portfolio company fees.  

Fee structure

Fund VII’s management fee structure also includes several significant changes from that of its 2012 predecessor, the $16 billion Blackstone Capital Partners VI. The new management fee structure, which includes a steep discount from the 2 percent management fee typically offered by smaller funds, is possibly more expensive than what was offered in on Fund VI, according to LP memos.

In 2011, the New Jersey Division of Investment committed $50 million to Fund VI. The pension manager agreed to a blended 1.3 percent fee on committed capital during the fund’s investment period. That fee fell to 0.75 percent on invested capital at the conclusion of the investment period. Proposed terms for a Los Angeles County Employees Retirement Association (LACERA) commitment to Fund VI depict a similar step-down to a 0.75 percent management fee, albeit from a 1.5 percent initial fee on committed capital. 

Like Fund VI, Fund VII’s annual management fee could dip to as low as 0.75 percent by the end of the vehicle’s life, according to LP memos. That said, the fund will take a more gradual path to that 0.75 percent mark.

Blackstone will charge a 1.5 percent fee on committed capital during the fund’s six-year investment period. The fee falls to 1.25 percent during the two years following the investment period, then 1 percent for the two years after that. Blackstone Capital Fund VII would then charge 0.75 percent for the remainder of the fund’s life.

In January, New Jersey’s state investment council approved a $50 million commitment to Fund VII and its step-down management fee structure.  

New Jersey did not respond to a request for comment.

More favorable

Los Angeles County considers 15 of Fund VII’s 17 key terms to be in compliance with guidelines from the Institutional Limited Partners Association (ILPA), according to investment materials.

Blackstone will provide a $400 million commitment to the fund. As with Fund VI, the firm may increase its commitment to as much as 7.5 percent of the equity Fund VII commits to new deals each year, according to LACERA documents.

“Staff believes this is an above-market term and favorably views this commitment as a strong alignment of interest from the general partner,” a LACERA memo states.

Blackstone Capital Partners VII terms
Management fee	Investment period: 1.5 pct of committed capital. For the following two years, 1.25 pct. For the next two years, 1 pct. Fee falls to 0.75 pct after.
Carry	20 pct
Preferred return	8 pct compounded annually
Key-man provision	All three of Joe Baratta, Hamilton James, Stephen Schwarzman or a majority of the 16 senior managing directors cease to be involved
Fund life	11 years (six-year investment period)
Distribution waterfall	American
First close	Mid-April 2015
Sources: San Francisco Employees’ Retirement System, Los Angeles County Employees Retirement Association