Private Equity Management Fees Come Under Fire

LONDON (Reuters) – Private equity management fees, which allow large funds to earn hundreds of millions of dollars in addition to performance fees, must be reformed, a top private equity investor told a conference on Wednesday.

Solomon Owayda, chief investment officer of SVG Advisers, the private equity fund management arm of quoted private equity group SVG Capital Plc SVI.L, questioned the need for mega-buyout funds to charge the traditional 2 percent management fee on top of the performance-related carried interest system.

The carried-interest system allows private equity firms to take 20 percent of returns for putting in just 1 or 2 percent of their own money into a fund.

“I am going to have a hard time when someone is trying to raise their third or fourth fund and it’s going to be $4 or $5 billion and they still want to charge 2 percent — I would have a hard time with that,” Owadya told the emerging markets private equity forum.

The fundraising environment has become more competitive as more and more private equity houses seek to raise funds for takeover opportunities which may arise as a result of global economic turmoil.

U.S. private firm Blackstone (BX.N: Quote, Profile, Research, Stock Buzz) is raising a $20 billion buyout fund, while UK-based CVC Capital Partners [CVC.UL] is looking to raise 11 billion euros ($14.1 billion).

Owayda said 2 percent was an acceptable management fee level 20 years ago when $500 million was considered a mega-fund and the $10 million allowed for overheads such as salaries, offices and travel.

“For some reason that 2 percent stuck even when somebody is raising $10 billion,” said Owayda. “Why on earth would anybody need 2 percent on 10 billion when they are raising fund four?”

Owayda said SVG Advisers had rejected large funds not only on the basis of fees but also a lack of alignment of interests with investors. He said he was shocked that any investor into a $10 billion fund would accept management fees of $200 million.

“We used to ask for budgets; now when I ask to see the budget they look at me like I have two heads. Well, I am going to look at the budgets and other LPs (limited partners) are going to look at the budgets because terms are going to have to change. We are not going to invest in somebody where there is no alignment of interest,” he said.

SVG Capital is the largest investor in Permira [PERM.UL], accounting for around one third of the European buyout house’s investor commitments.

By Simon Meads
(Editing by David Holmes)