This space hasn’t always been too kind toward Bain Capital, in regards to the extraordinary fees it charges its (submissive) limited partners. Today, however, we need to give some credit where it’s due.
The Boston-based buyout firm is proposing an amendment to all of its active private equity funds, which would temporarily waive all of its quarterly management fees. Those funds would instead be available for follow-on investment in existing portfolio companies, with the fees to ultimately be paid back out of the fund’s gross profits (assuming there are some).
This strategy won’t matter much for relatively-uncalled Bain funds – like its tenth general PE fund or its third European fund – but is a big deal for a vehicle like Bain Capital IX, which is around 98% invested. Rather than using that final $160 million for fee payments, Bain would use it to inject additional equity into select existing investments.
I’m not suggesting that this is a perfect proposal for limited partners. Most of them would surely prefer a permanent fee waiver, rather than a system that ultimately could require them to pay more cash than they would under current obligations. And it may not do much to abate LP liquidity crunch issues, given that Bain will still call down capital (albeit for a different purpose).
But, with all that said, this is still a step in the right direction. More general partners need to recognize growing LP resentment with existing fee structures, particularly at big buyout firms where new deals are hard to come by. The fee structure was not originally set up to help PE pros get rich while sitting on their hands. Instead, it was supposed to help keep the lights on in order to transact deals that would be the actual wealth-makers for both parties.
During an ACG Boston panel discussion last week, I asked each panelist if his firm planned to somehow alter management fees on existing funds. They all responded negatively. They are all wrong. I’m not saying their firms should each follow the Bain deferral model, that they should do something even more LP-friendly. But they should do something.
Most VC firms that altered fee structures – or cut fund sizes – back in 2001-2003 were easily able to raise subsequent funds. Some current buyout pros argue that most VC firms that didn’t make such adjustments also raised funds. But we are not in 2003, when limited partners were flush with alternative allocations. We’re in 2009, when capital constraints will force most LPs will have to say goodbye to some of their existing managers. A little sugar now should go a long way later.