The End of Transaction Fees?

Tom Danis of RCP Advisers suggested yesterday that one reason Charlesbank Capital Partners had an oversubscribed fundraise was that the new vehicle’s terms gave 100% of transaction fees to limited partners (rather than a split). It wasn’t so much the expected dollars, Danis said, but more that Charlesbank was responding to what is broadly seen by LPs as a fairer alignment of interests.

Handing 100% of transaction, portfolio monitoring and other fees is a key tenant of the ILPA guidelines proposed earlier this year. But here is my question: If most firms adopt the ILPA guidelines on fees, will that end the taking of fees? In other words, will GPs still have incentive to pilfer from portfolio companies if they can’t stuff any of it in their back pockets?

I asked this question of a few different people yesterday – both on stage and elsewhere – and received a multitude of answers. Danis, for example, believes that such a sea change would, indeed, severely limit fee-taking. John Morris of HarbourVest Partners, on the other hand, argued that GPs would still charge fees in order to boost short-term IRRs and to accelerate their move into the carry.

Curious to hear your thoughts. I’m also going to attempt a bit of quantitative research on the matter next week (too difficult while on the road), by looking at the practices of a firm like Warburg Pincus, which has long given 100% of its fees to LPs. Does it typically charge less than its peers? Won’t prove definitive, but should at least be illuminating.