Alternative investments such as infrastructure and private equity aren’t for the shallow-pocketed. Data provided by the Maine Public Employees Retirement System reveals just how big a bite fees and expenses can take in the early years of limited partnerships.
Take Carlyle Infrastructure Partners, a fund to which MainePERS committed $50 million in November 2007. Of that sum The Carlyle Group had drawn down $23.2 million as of June 30, distributed back just over $600,000, and generated a total gain (including unrealized appreciation) of $2.9 million, according to information provided on the MainePERS website. Meantime, Carlyle Group over the last four years has charged $4.6 million in “total fees and expenses,” nearly 20% of the amount drawn down, or nearly 17% of the amount drawn down adding in fees and expenses. (It appears that MainePERS excludes fees and expenses from the amount drawn down, but I was unable to confirm that with the pension fund by press time.)
North American buyout firms typically charge an annual management fee of 1.5% to 2% during the investment period of their funds, then ratchet the fee down in the later years. They also may charge their funds a variety of expenses, such as broken-deal expenses and the costs of annual meetings.
Needless to say, investors blessed with top-quartile returns, which typically pound public equity indices, have little reason to complain about fees and expenses, which, after all, pay for the generation of those returns. The track record of Carlyle Group is impeccable. In the early years of funds, fees and expenses often look high compared with money drawn for investments, and any interim numbers such as these represent mere snapshots of partnerships that last 10 years or more. Moreover, in most private-equity partnerships the general partner calculates its profit-share, or carried interest, only after netting out fees and expenses.
Still, lower fees and expenses translate into higher returns for both limited and general partners. And investors do regularly complain that high management fees in particular can contribute to a misalignment of interests, particularly in light of the private-equity market’s generous salaries and bonsues. Investors naturally prefer partners to get wealthy from carried interest, not management fees, to maximize their incentive to invest prudently.
At the Buyouts Texas event in November, hosted by sister publication Buyouts Magazine, two limited partners, Janna Laudato, managing director of Hauser Capital Markets, and Andrea Kramer, managing director of Hamilton Lane, both said they’ve recently seen general partners trying to shift more expenses from their firms to their funds. According to PE/VC Partnership Agreements Study 2012-2013, soon to be published by Thomson Reuters (publisher of peHUB), the general partners of North American venture and buyout funds typically bear the expense of deal sourcing and monitoring, travel and placement agents; but more often than not it is the fund that bears the costs of broken-deal expenses, reverse break-up fees, advisory boards, annual meetings and outside consultants.
The slideshow below shows total fees and expenses charged by six vintage 2006 to 2009 funds in the MainePERS private-markets portfolio; inclusion in this slideshow is not meant to imply their fees and expenses are high or unjustified. All data comes from MainePERS. I attempted to contact each of the funds to verify the figures, and to solicit any comment, which I include where appropriate.
[slide title=”Global Infrastructure Partners”]
Commitment: $75 million
Date of Commitment: 3/31/2008
Contributed: $65.6 million
Total Fees & Expenses: $6.9 million
[slide title=”Carlyle Infrastructure Partners”]
Commitment: $50 million
Date of Commitment: 11/2/2007
Contributed: $23.2 million
Total Fees & Expenses: $4.6 million
[slide title=”Alinda Infrastructure Fund II”]
Commitment: $50 million
Date of Commitment: 9/17/2009
Contributed: $19.3 million
Total Fees & Expenses: $3.3 million
[slide title=”Oaktree Opportunities VIII”]
Commitment: $30 million
Date of Commitment: 12/9/2009
Contributed: $21.8 million
Total Fees & Expenses: $739,264
Comment from firm: A managing principal at the firm points out that the firm has a particularly LP-friendly waterfall distribution ensuring that LPs get all their contributed capital back and a preferred return before the GP shares in the profits (with no catch-up). The firm also gives 100% of deal-related fees to the LPs.
[slide title=”Carlyle Asia Partners III”]
Commitment: $15 million
Date of Commitment: 12/31/2009
Contributed: $6.6 million
Total Fees & Expenses: $1.2 million
[slide title=”Cube Infrastructure”]
Commitment: 40 million euros
Date of Commitment: 4/16/2010
Contributed: 22.9 million euros
Total Fees & Expenses: 1.2 million euros