Spat Over Sealy Puts Spotlight On Firms’ Fees

  • Activist shareholders go after KKR’s fees on company
  • Some firms are reducing transaction fees
  • LPs push back as well on fees and carry

Although the particulars of this controversy are distinctively a hedge fund power play, it comes at a time when some fund managers are pulling back from such fees, in part due to competitive pressures and in part because of the heightened scrutiny that private equity firms are receiving in the contemporary economic environment.

Even before the activist investor H Partners Management LLC began its campaign against Kohlberg Kravis Roberts & Co. over the fees it has charged Sealy, some fund sponsors have been reducing or eliminating the fees they charge portfolio companies—transaction fees for their advisory services in closing a buyout deal, monitoring fees for their ongoing management services to the portfolio deal, director fees for serving on a company’s board, and, as in KKR’s case, consulting fees that can continue even after a company goes public.

The European buyout firm Permira Advisers Ltd, for instance, is promising it won’t charge transaction fees on its €6.5 billion ($8.7 billion) fund Permira V, as sister Web site peHub reported in December. Another European shop, Apax Partners, is offering its LPs a 100 percent offset on transaction fees on its €9.0 billion AVIII fund.

Permira declined to discuss its policies on fees, although a person familiar with the firm said it has not charged transaction fees since 2009 and is simply employing the same approach with the new fund. Apax Partners did not reply by deadline to a request for comment.

Firms may have a number of reasons to forgo such fees. In a competitive deal environment, a management team may prefer to choose a sponsor that won’t take such fees out of the company. Taking a pass on fees may strengthen the company’s P&L, giving it greater room to pay down debt, and its balance sheet, perhaps enabling a future dividend or a stronger exit.

Then there is the alignment of interests between the sponsor and the management team. “We focus tremendously on the concept of alignment,” said Kewsong Lee, a managing director at Warburg Pincus, a New York firm that has never charged fees to its portfolio companies since the firm’s founding in 1966.

Lee downplayed the question of a competitive advantage against deal-making rivals, saying instead that the decision against fees was more cultural and philosophical in a firm that was founded as, and to a considerable degree remains, a growth-oriented investor.

“Capital is precious and should be reinvested back into the company,” Lee told Buyouts. “We really kind of make money the old-fashioned way. We invest at one price, and if we do our job and management does their job, then the value goes up.”

Still, with other fees also coming under pressure, those on portfolio companies may become relatively more valuable to sponsors. In a highly competitive fundraising environment, investors are increasingly pressing their GPs to reduce fund-management fees, and some big pension plans have begun making fewer but bigger commitments to sponsors, with reduced fees a major part of the incentive.

Portfolio company fees lie at the heart of the Sealy dispute. The hedge fund H Partners, which is Sealy’s second largest shareholder with a 14.5 percent stake, ratcheted up the pressure in a March 27 letter focused largely on the fees charged by KKR and Capstone, KKR’s in-house consulting firm. H Partners previously demanded seats on the board and on Sealy’s nominating and governance committee.

By the end of the month, another investor had joined H Partners’ complaint, sister news service Reuters reported. San Francisco-based FPR Partners, which owns 7.7 percent in Sealy, said the company should appoint other “qualified” shareholders to the board, giving representation to investors other than KKR that controls 46 percent of the company.

In an e-mail, a Sealy spokesman said the company was “committed to delivering long-term shareholder value and continued to be open to constructive dialogue with all of our shareholders,” Reuters said.