Few institutional investors disclose data related to fees and expenses that they pay sponsors. An analysis of a couple that do, the Indiana Public Retirement System and the Maine Public Employees Retirement System, finds, no surprise, that in general they are relatively high, especially compared to more traditional asset classes.
According to the latest edition of the PE/VC Partnership Agreement Study, published by Thomson Reuters, based on a survey conducted last year, more than three-quarters of North American buyout firms charge a starting management fee of 2 percent of commitments, while about 15 percent charge less than that. In many cases, sponsors agree to offset those fees with a good portion or all of any transaction, monitoring and related fees that they charge portfolio companies. Sponsors also typically scale down their management fees after a fund’s investment period ends.
At the same time, the study found a great deal of variation in the way that sponsors and funds handled expenses—whether the general partner pays, whether the fund pays or whether they share an expense. As a general rule, the GP agrees to pick up expenses such as deal sourcing and monitoring, placement agent fees and travel; the fund usually pays for such things as annual meetings, broken-deal expenses and advisory board expenses. But not always.
So, what does this translate into for actual investors?
The Indiana retirement system paid management fees of $35.3 million to private equity sponsors in the fiscal year ended June 30, 2013, according to a financial report on its website. That represented 1.26 percent of its $2.8 billion-asset program (as of June 30, 2013), which was launched in 2002. (It represented 0.69 percent of total private-equity commitments outstanding as of year-end of about $5.1 billion.) Among the eight asset classes in the $21.5 billion total defined-benefit-plan portfolio, that management-fee percentage of assets was second only to absolute return assets (1.94 percent), but higher than commodities (0.57 percent), real estate (0.45 percent), public equities (0.35 percent), risk parity (0.26 percent), fixed income-ex-inflation-linked (0.20 percent) and fixed income-inflation-linked (0.19 percent).
The $11.3 billion Maine retirement system is one of the rare limited partners to show combined fees and expenses paid since inception for each limited partnership in its 48-fund, $724.0 million private markets portfolio as of year-end, according to data available on its website. The portfolio is very young: The oldest vintage year is 2006, and not all of the sponsors had begun charging fees and expenses as of year-end. The total $66.9 million in fees and expenses paid since inception represents 9.24 percent of the asset value of the private markets portfolio, and 3.11 percent of the total outstanding commitments of $2.2 billion.
To get a better sense for how much Maine Public Employees Retirement System is paying per year to sponsors, Buyouts looked at 25 funds for which the retirement system had paid at least some fees and expenses as of year-end 2012. The total fees and expenses paid by the retirement system during 2013 to sponsors of those 25 funds was $12.2 million. That represented 2.04 percent of the $598.8 million in market value for those funds as of year-end 2013; it represented 1.16 percent of the $1.1 billion in commitments made to those funds.
It’s interesting that with both Indiana and Maine retirement systems, neither management fees alone nor total fees and expenses comes close to 2 percent of committed capital. No doubt that speaks in part to the size of management fee offsets. To know for sure, we’d need these LPs to pull back the veil even more.