One of the world’s largest private equity firms will no longer draw accelerated monitoring fees from portfolio companies, the Wall Street Journal reported on Wednesday. A Blackstone spokesperson was not immediately available for comment.
The accelerated-fee practice was “not helpful” to the firm’s relationship with fund investors and feared the “bad perception it could engender”, the WSJ reported, citing a written exchange between Blackstone and one of its LPs. Blackstone is reportedly seeking $16 billion for its next flagship buyout fund.
Portfolio companies pay their private equity owners an annual sum for ongoing management and advisory services, known as “monitoring fees”. Often these arrangements are structured as ten year deals or longer. Typically an early exit from the company results in any unpaid monitoring fees “accelerating” to the private equity owner, even though the work no longer has to be performed.
In May top Securities and Exchange Commission (SEC) inspector, Drew Bowden, challenged the practice. Speaking at the 2014 PEI Private Fund Compliance Forum in New York, the SEC official said: “There is usually no disclosure of this practice at the point when these monitoring agreements are signed, and the disclosure that does exist when the accelerations are triggered is usually too little too late.
Accelerated monitoring fees paid by current portfolio companies will be distributed to investors, or will offset other fees by a commensurate amount, the WSJ report said.
Blackstone, which manages $279 billion in assets, is often a pacesetter on industry practice, leading to the possibility of more firms following suit amid the heightened SEC scrutiny and investor demands.
In the November edition of pfm, we’ll unveil results from a first of its kind fee and expense survey that benchmarks current practices on monitoring fees, among many other areas.