Transaction and monitoring fees have gone up since the debt crisis, according to a study from Dechert and Preqin.
The report, “Transaction and Monitoring Fees: On the Rebound,” from Dechert partners Derek Winokur and R. Jeffrey Legath, looked at 143 leveraged deals from 2005 to 2010.
Transaction fees, which PE firms charge upon the close of a deal, increased for middle market and large deals. The mean, or average, transaction fee charged on small deals in 2009 and 2010 was 1.28% of the deal size. This is up from a mean of 1.21% charged for small deals occurring from 2005 to 2008, the study says.
Middle market deals, those ranging from $500 million to $1 billion, showed a bigger jump. The mean, or average, transaction fee charged was 1.24% from 2009 to 2010, compared to 0.99% for deals taking place from 2005 to 2008.
The mean for large deals, those valued at more than $1 billion, jumped to 1.04% in 2009 to 2010 from 0.80% during the 2005 to 2008 time period.
Both Winokur and Legath say that the market has rebounded from the credit crisis and M&A has increased. “It doesn’t feel like the frenzy of 2007,” Winokur says. “And yet fees have gone up?”
One reason may be that deals are taking longer and are harder to complete, Legath says. And, some PE firms are putting in more equity.
During the boom of 2007, PE firms were typically writing equity checks of 25% to 30%, he says. Now, some have to put in from 40% to 50% equity. “PE firms are effectively bridging deals now,” Legath says. “That is much more expensive.”
Monitoring fees, which are typically paid as a percentage of EBITDA, also went up since crisis. The increase was most startling for smaller deals, those less than $500 million. These transactions charged a mean of 2.53% for deals occurring from 2009 to 2010. This compares to 1.92% for transactions taking place from 2005 to 2008.
Middle market deals saw monitoring fees rise to a mean of 1.79% for the 2009 to 2010 time period. This is up from 1.54% charged from 2005 to 2008. Large deals saw the mean rise to 1.50%, up marginally from 1.48% during 2005 to 2008.
How are these fees divvied up? Nearly 37% of the PE firms said that all or a significant portion of the fees were split by the LPs. About 44% said they divided the fees evenly between the GP and/or the LPs. The remaining 20% said that all or a significant portion of fees are paid to the GP.