EVCA warns against regulation on fees

EVCA warns against regulation on fees

Javier Escharri, secretary-general at the EVCA, has cautioned against government regulation of management fees and Sarbanes-Oxley style reporting requirements following the publication of a 56-page interim report from the Treasury Select Committee earlier this week.

“We’re surprised that they entered the territory of fees as those are negotiated in a free market and we have not heard any complaints from investors,” said Escharri. “The returns that they are getting net of fees remain very competitive, especially when fee structures in other non-private equity markets are actually very similar.”

While noting comments from buyout executives that investors get good value for their management fee in a fiercely competitive market, the Treasury’s report quoted Professor Williams at the University of Manchester, who said that the willingness of investors to pay high fees was down to a lack of information and understanding.

As a result, the committee urged Sir David Walker to review a provision for further information on fees to make the private equity market “more competitive”. Walker is chair of a BVCA-backed working group that published a series of voluntary recommendations for improving openness and transparency in mid-July.

Peter Taylor, a managing partner at UK mid-market firm Duke Street Capital, which also featured in one of the hearings carried out by the committee during the summer, agreed that terms on fees and carry structures are generally well known and established, with few complaints from limited partners.

In reference to the potential for Walker to push for more disclosure on limited partners, Taylor added that the investor base “is confidential and should remain so. When there is one investor with a large influence over the general partner, that could be different, but in most situations the identity of our investors is and should remain confidential.”

However, other areas of the report were given a cautious welcome. Taylor said that it showed the government had “moved quite a long way in their understanding of the industry” and suggested there needed to be more input from other participants, including lenders, limited partners and managers of investee companies.

Damon Buffini, managing partner of Permira, the buyout firm that much of the recent debate on the industry has focused on, released a statement saying that the firm agreed that there were issues “that need to be addressed” and “we need to engage much more with those rightly interested in private equity”.

Escharri also praised the measured tone of the report, stressing the importance of private equity’s role in both the UK and European economies.

He added that it was “unusual for us to enter into a UK debate, but we have a very strong UK member base who are concerned about what’s going on and London has a big impact on pan-European mandates for the private equity industry. This report could have an impact on what happens in other countries and the last thing we at EVCA want to see is a Sarbanes-Oxley regulation for the UK.”

Escharri said that tax regulations on carried interest and interest expenses could have a serious impact on the UK’s financial sector and reiterated the need to separate the large buyout segment from the growth capital and mid-market buyout markets.

Another key area of the report – concerns about over-leveraging and covenant-light agreements – was unlikely to be as relevant by the time the committee releases further recommendations in the autumn, said Walker.

“When they come back, the leverage markets will have provided their own answer,” he said. “Covenant-lite was a red herring. ‘Cov-lite’ was a good sound-bite but it was a tiny part of the market.”