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Pension funds and other investors have been able to wield increasing pressure on private equity funds to cut fees since the financial meltdown, as many investment firms have found it harder to raise fresh cash.
“It just drives me nuts when I think about managers who are generating profits off the management fees,” Dear says. “That’s why this drive to get better terms is so fundamentally important.”
Dear, who was speaking at a panel at the Milken Institute Global Conference late last month says, “There’s never been a better time [for investors] to press their case and if we don’t take advantage, it’s a missed opportunity.”
Private equity firms typically make money from carried interest, the slice of the profit they take from investing capital. They also generally charge management fees of 1% to 2 percent.
Investors frequently argue that funds should only be incentivized by the carried interest profits, not by making money from the management fee.
Apollo Management agreed to a deal with CalPERS to reduce fees for the pension fund giant—not for traditional private equity investments, but for funds that the buyout shop manages solely for the giant state pension fund.
“That’s a significant step forward and we intend to take that to our other significant private equity relationships,” Dear says.
In March, Dear met some executives from the private equity industry at a closed door meeting organized by the Institutional Limited Partners Association (ILPA), which represents CalPERS and other LPs.
ILPA has put forward a number of principles that it wants general partners to follow.
Those include having the firms and LPs align their interests. Also, the ILPA says that fees should not be excessive and that changes in tax law should not be passed on to investors in a fund, according to the ILPA website.
“My hope is that ILPA takes those [principles] and have a third party rate all the private equity managers on compliance with those principles,” Dear says.
That will help institutionalize private equity as an asset class and drive down the cost towards the point where the investor and the private equity firm make money at the same time, he says.
In regards to the deal that Apollo struck with CalPERS, the firms said that the agreement would “further align the interests” of the two institutions and “set a new standard among pension funds and their investment advisers.”
“We have had a very successful 15-year relationship with CalPERS,” Apollo’s CEO Leon Black said in a press release. Apollo manages close to $2 billion for CalPERS, according to a source familiar with the situation, which is separate to any money the pension fund has invested directly in Apollo’s funds.
Under the deal, CalPERS is incentivised to invest more funds with Apollo, the source says.
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