Blackstone alters fee-sharing policy

The buyout giant revealed that it will go beyond pulling back on accelerated monitoring fees, moving to a 100 percent fee offset for its latest fund.

In the latest example of a fund manager instituting more investor-friendly fee policies, The Blackstone Group has chosen to share 100 percent of any deal or monitoring fees with limited partners in Blackstone Capital Partners Fund VII, according to the firm’s earnings call last week. The fund is currently in market targeting at least $16 billion.

Under the new fee offset structure, the GP will use 100 percent of any fees it collects for closing an acquisition or for monitoring existing portfolio companies to pay down its investors’ management fees.

Although there is some speculation that the altered structure is a response to queries from the US Securities and Exchange Commission (SEC), Blackstone president Tony James refuted that theory during the call.

“This has nothing to do with the SEC, it’s just the economics of the business,” said James. “LP demands are such that just more and more of [the fees] go straight to the LPs.”

One LP told pfm that while Blackstone’s new fee sharing policy is a step in the right direction, it does not come as a surprise. “The trend in management fee offsets has been racing toward 100 percent back to the LPs since ILPA released its principles,” the LP stated.

In October, news broke that the firm was doing away with the controversial practice of collecting accelerated monitoring fees from portfolio companies. Blackstone pulled the practice because it was “not helpful” to the firm’s relationship with fund investors and it feared the “bad perception it could engender,” The Wall Street Journal reported.

Blackstone is not alone when it comes to recently reworking fee and expense practices. Following a presence exam with the SEC, Freeman Spogli revealed that it would allow investors in its latest fund to hire an independent adviser in order to monitor the fund’s financial records and scrutinize the fund’s governance practices for conflicts of interest, according to The New York Times. SEC officials said that Freeman Spogli appeared to be violating fee-sharing arrangements with investors in two prior funds.

In total, 51 percent of private fund managers subject monitoring fees – which the management firm collects on sale of the portfolio company which has been accruing since the investment was made – to a fee offset, according to a pfm fees and expenses benchmarking survey (see November issue). More than a third (40 percent) of respondents said they do not charge portfolio companies monitoring fees whatsoever.