The debate around transparency over management fees is raging on, and private equity is at the center. A recent Financial Times article said “anger has erupted” over pension funds having to sign non-disclosure agreements over private fund fees. Days later The Wall Street Journal reported that KKR was warning an LP to ignore media requests for more fee disclosure or risk losing out on future KKR funds.
In this context, GPs are being portrayed as secretive and heavy-handed. But so far, what hasn’t been addressed properly is why GPs are apparently so keen to prevent fee receipts from entering the public domain in the first place.
Speaking to pfm off the record, no manager has ever told us that they consider management fees a vital trade secret. No one has defended the idea that disclosing them can make or break a firm.
What we are hearing instead is that GPs perceive the fee debate as a proxy battle for disclosing other data that really are sensitive to the firm’s ability to do business, such as the finer points of their investment strategies, key man clauses and the like. All these things are documented in the LPA, and if the LPA can no longer be subjected to non-disclosure, then sooner or later demands will be made to publish other types of fund-specific information also.
In addition, managers worry that information about their fee structures will be taken out of context. Some GPs deliberately operate on a higher cost basis than others, because their chosen approach to generating returns is more labor-intensive and therefore more costly. In an environment where media coverage is often skeptical of the industry, GPs are probably right to worry that their management fee will be readily labelled “too expensive,” regardless of whether or not it can actually be justified on operational grounds, and also regardless of whether the investors might have happily agreed to pay it.
Neither should it be overlooked that the fees a given investor is paying are often the result of a negotiation. The GP might agree to charge some investors in the fund a lower fee in return for larger capital commitments, and who’s to say that this shouldn’t be permissible? Such arrangements can be advantageous to both sides, but in practice, full transparency would make it difficult to arrange them.
These are some of the points the industry should be making more forcefully. Only then can a sensible debate be had about who stands to ultimately benefit from disclosing fees, and whether or not the private equity industry should concede on the issue.
At the moment, it’s hard to make that determination. What is needed is a more fully formed conversation about whether fee transparency matters and to whom. Private equity should seize the initiative.