David Toll

Stephen Feinberg, co-founder of turnaround specialist Cerberus Capital Management, and more Howard Hughes than David Rubenstein when it comes to public appearances, stunned a Boston crowd of private-equity professionals this week by suggesting that the industry may be hauling in too much in management fees. "In general, I think that all of us are way overpaid in this business. It is almost embarrassing," said Feinberg, speaking on Tuesday at the SuperReturn conference in Boston, according to sister news service Reuters. Cerberus Capital closed its most recent core fund in 2007 at $7.5 billion--a sum that would translate into a $75 million per year revenue stream for the firm during the investment period were it to charge a modest 1 percent management fee. (By press time Cerberus Capital's media department had not responded to my question about what the firm actually charges.) Below I thought I'd share results from our 2010 annual compensation survey of North American venture capital firms, showing the top 10 positions for salary and bonus compensation. Click here if you're a buyout or venture firm interested in participating in our 2011 survey. You can weigh in here on the question of whether you agree PE executives are overpaid.

Buyout firms hardly buy into the argument that they could help trip another financial crisis. No matter. They now find themselves battling proposed rules limiting incentive-based compensation rooted in the premise that they could. The rules may also give limited partners a stronger argument for back-ended carry distributions. It’s yet more fallout from the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted last summer, which requires buyout shops with more than $150 million in assets under management to register as investment advisers with the Securities and Exchange Commission. (Although the SEC has indicated it may extend the July 21 deadline to register, industry observers say it is unlikely that grass-roots efforts will succeed to repeal the requirement altogether.) From the perspective of your run-of-the-mill buyout shop, the prospect of registering—necessitating the appointment of a compliance officer and the development of a compliance program—is viewed as burden enough. But Dodd-Frank has the SEC and other agencies piling ever more rules on their backs. This week the Private Equity Growth Capital Council weighed in with comments on one of the latest proposed rules, which would put limits on incentive-based compensation at covered financial institutions. Buyout shops with $1 billion more in assets—a good portion of the market—would likely have to comply. (Those with $50 billion or more in assets face additional restrictions.)

Imagine committing $500 million to 10 private equity and venture capital funds, seeing $444 million drawn down, then kicking back and relaxing as more than $1.8 billion funnels back from your able general partners over the next several years. Such has been the good fortune of the California State Teachers' Retirement System--if you count only the top 10 investments it ever made in the asset class, out of some 249 funds backed since 1989. Those top 10 have generated a 4.2x cash-on-cash return, by our count, and that doesn't include the value of remaining holdings (which CalSTRS doesn't disclose in its Sept. 30 2010 performance numbers). All told, our calculations show CalSTRS achieving a median IRR of 8.0 percent on its vintage-2006 and older collection of 182 funds as of Sept. 30. Breaking into the top-quartile meant hitting about a 16.5 percent IRR, while generating a -0.71 percent IRR or worse landed you in the bottom quartile. In other words, CalSTRS has so far lost money, on paper, on more than one in four of those funds--a far cry, no doubt, from what their managers promised. As for the top 10, shown in the slideshow below, mid-1990s venture funds are well-represented, as you would expect. But a subordinated debt fund? An opportunities fund from a certain distressed debt specialist expected to go public shortly? Both there as well.

Buyout firms chilled by the prospect of registering as investment advisers with the SEC got a bit of good news this month. A House subcommittee sent a bill that would repeal the Dodd-Frank requirement to the full House Financial Services Committee for further action. That follows indications by the SEC that it would extend the July 21 deadline for coming into compliance. Still, the bill is a long way from becoming law. It would need to pass the House, the Senate, and secure a vote from a president unlikely to look kindly on reversing any portion of one of his signature legislative achievements. Here at peHUB, we're guessing you may have questions about the SEC registration requirement, from the odds of the legislation getting repealed to which investors will be included under its umbrella (late-stage venture firms?) to what you can do in advance. So, mark your calendars--next Wednesday, May 25, at 11AM, we will have two experts online--Barry P. Schwartz, partner at ACA Compliance Group (pictured) and Elizabeth Shea Fries, partner in Goodwin Procter's Business Law Department and a member of its Financial Services Group--to answer your questions about SEC registration via a live blog. Just come to peHUB for the Q&A. Meantime, send your questions to david.toll@thomsonreuters.com.

The Institutional Limited Partners Association has largely wrapped up work on a standard reporting format that it hopes private equity firms will adopt for quarterly and annual reports sent to investors. The guidelines are “pretty much ready to go,” said Kathy Jeramaz-Larson, executive director of ILPA, in an interview with peHUB earlier today. Among the matters left to be settled: what form to distribute the new standard in, and how to distribute it. ILPA, which has already shown the proposed format to members, was set to host a CFO roundtable early this week in New York to get a wider set of feedback prior to publication. Jeramaz-Larson said she expects about 50 people to attend, including CFOs from a diverse group of GPs, as well as their counterparts working in the back-office of LPs.

Long before the pay-to-play scandals in present-day New York and New Mexico came a whopper of one more than a decade ago in the state of Connecticut. Today a firm that took a glancing blow from that scandal is emerging with a new name, HCI Equity Partners; a fresh $200 million fund; and a strategy of buying and selling small but growing industrial products and services companies generating $20 million to $200 million in annual revenue. The firm has also scored some recent exits. HCI Equity was expecting today to close the sale of its stake in Mistras Group Inc., whose products are used to test the integrity of tanks, pipes, valves and other industrial products. In March the firm sold its stake in Progressive Waste Solutions, which provides waste disposal services to both commercial and residential customers. Both companies are traded on the New York Stock Exchange. A quick history lesson to demonstrate the challenges the firm overcame: In 1999 the disgraced ex-treasurer of Connecticut, Paul Silvester, pleaded guilty to racketeering charges for accepting payments—or directing payments to others—in return for making state pension-fund commitments to several investment firms. (Sound familiar?)

What stories did your colleagues find to be must-read this past week? Below are the 10 posts that were most popular with regular readers of peHUB: Miami Shop Eyes $450 Million for Growth Buyouts, by Bernard Vaughan Arsenal Capital to Reload with Fund III, by Jon Marino Banned for Life: Catching up with Entrepreneur Noah Kagan, by Connie Loizos As Froth Makes Comeback, So Does 'Sudden Wealth Syndrome,' by Connie Loizos BrightSource IPO Could Make Big Winners of VantagePoint, DFJ, by Mark Boslet Welsh Carson Looking for "Toeholds": Queally, by Bernard Vaughan CI Capital Raises $620M for Roll-Up Deals, by Steve Bills Poll Results: Majority Believes White iPhone 4 Will Be Released But Most Would Still Buy iPhone 5, by Luisa Beltran Tony Roma's, Known for Its Ribs, is Up for Sale, by Luisa Beltran Patria, Backed by Blackstone, Seen Smashing $900M target of Fourth Fund, by Luisa Beltran

Scott Sperling, co-president of Boston-based buyout shop Thomas H. Lee Partners, this week said he sees continuing opportunities to buy companies providing services to other businesses. "That's one of the major thrusts we still see out there," he said. Speaking Tuesday at the Buyouts New York conference, where he was interviewed as part of a "Newsmakers of the Year" program by Reuters journalists Felix Salmon and Chrystia Freeland, Sperling seemed particularly excited by the firm's purchase last year of inVentiv Health Inc. for less than 7.5x EBITDA. The company provides clinical trial and other services to pharmaceutical companies. Sperling described the deal as "very complex"--just the kind of transaction Thomas H. Lee favors to keep rival bidders at bay. The firm, which plans to help inVentiv Health expand through a combination of organic growth and acquisitions, announced this January two add-on acquisitions, that of Campbell Alliance and i3. For more on Sperling's views on business services, China and deal pricing, click below.

Want to know what's going on with partnership terms and conditions? Let's just say it's a good time to be a limited partner. State plans such as California Public Employees' Retirement System, New York State Common Retirement Fund, New York City Retirement Systems and the Washington State Investment Board, together with their advisers, are successfully applying pressure on terms—and not just on softer items like key-person provisions but on core economic terms like management fees that directly impact general partner economics, said Michael Harrell, a partner at Debevoise & Plimpton who represents such blue-chip names as Clayton, Dubilier & Rice and Oaktree Capital. "Even the best, most established firms are pushing against the wind," he added. Indeed, it looks like Bain Capital, the Boston shop that moved to a 30-percent carried interest more than a decade ago, may have trouble staying at that lofty perch.

Just as VC fundraising roared back to life in Q1, so did fundraising on the buyout and mezzanine side of the private equity market. Sister magazine Buyouts this week reported that U.S.-based buyout and mezzanine firms raised $18.3 billion in Q1, up 79 percent from $10.2 billion during the same period last year. Fundraising also grew sequentially, up 36 percent from the Q4. Kohlberg Kravis Roberts & Co. took in a tad over $1 billion for its latest effort in Q1, according to our calculations--but that was only good for seventh place among buyout and mezzanine shops that closed on capital last quarter. Click through for a slideshow leading you throught the top 10.