TSG lifts management fee, drops banking fee, after fund close

TSG Consumer Partners persuaded its limited partners to approve an amendment to raise the management fee on its two latest buyout funds to 2.1 percent from 2 percent, New Jersey State Investment Council documents show.

The firm closed TSG 7A and TSG 7B, which it raised concurrently, on a combined $2.5 billion in late 2015.

Under the original terms, management fees paid by fund investors were offset by half the investment-banking fees TSG charged the funds’ underlying portfolio companies, New Jersey documents say.

In December, TSG notified the state that a majority of its fund LPs had approved an amendment that halted TSG’s ability to charge or receive investment-banking fees after June 1, 2016.

The amended terms also raised the management fee to 2.1 percent from 2 percent, which could result in as much as $100,000 in additional fees for New Jersey over the next seven years, according to State Investment Council documents. In theory, the amended terms replace revenue TSG would have generated from investment-banking fees with management fees taken from limited partners.

The change’s actual impact will depend on how much TSG would have eventually charged its portfolio companies for investment-banking fees, the New Jersey documents show.

New Jersey committed $80 million to TSG 7A and $20 million to TSG 7B in 2015. New Jersey voted against TSG’s amended terms, pension documents say.

“Why would other LPs approve this?” asked State Investment Council Chairman Tom Byrne at the meeting, adding that he was concerned firms could summarily increase their management fees without significant pushback from their investors.

“They’ve performed really well and always been overallocated, so some LPs may view it as a way to keep [their allocation going] into the next fund,” said New Jersey’s portfolio manager, Meghna Desai, at the meeting.

TSG 6, a $1.3 billion 2012 vintage, was netting a 45.9 percent IRR through Dec. 31, 2015, Colorado Public Employees Retirement Association documents show. Fund 5, which raised $900 million in 2007, was netting a 16.7 percent IRR as of that date.

TSG, San Francisco, specializes in consumer-sector investments. Recent deals include the acquisition of Duckhorn Wine from GI Partners and a minority stake in Canyon Bicycles.

TSG declined comment.

Action Item: For more about TSG, visit www.tsgconsumer.com

The San Francisco skyline and the Golden Gate Bridge south tower are seen from the Marin Headlands above the fog in Sausalito, California, on March 21, 2012. Photo courtesy Reuters/Robert Galbraith