Fees and expenses has always been a sensitive discussion point between LPs and GPs. The biggest problem is transparency. LPs craving clarity push for more information, while GPs, obsessed with privacy, have been reluctant to change. It is a battle that has defined the asset class.
In late 2014 – when pfm first measured industry sentiment on fees – that status quo had come under threat. Months earlier Drew Bowden, then head of the Securities and Exchange Commission’s National Exam Program, had fired a warning shot across the bow of the industry. His speech, “Spreading Sunshine in Private Equity,” delivered at the PEI Private Fund Compliance Forum in New York, warned that change was coming and that the SEC would shed an uncomfortable light on how GPs share information on fees and expenses. Many in the industry were rightfully alarmed.
The original survey offered valuable insight into the fees and expenses debate in light of that speech. In many areas, there was a consensus. The majority agreed that management firms should bear the cost of things like SEC examinations. In other areas, it was more complex, with respondents split on the issue of fee offsets for operating partner expenses.
Fast forward two years and opinions are evolving. Fund managers have been able to get a better idea of where they stand with fees and expenses. SEC enforcement actions have made it clearer what regulators are looking for. Meanwhile, the Institutional Limited Partners Association has pushed the industry toward standardization with the release of its guidelines on fees disclosures.
Our latest survey bears this out, but not in ways one would expect. While there is an indication that some fund managers are abandoning certain fee practices and embracing better disclosures, there are also signs of pushback on fee allocation where it is clear that is the LP who benefits. The industry is still far from ras established standard for fees and expenses.
Methodology
What is the pfm 2016 Fees and Expenses Benchmarking Survey?
The survey was launched in response to fund managers’ questions about who should pay for various fees and expenses. The resulting report is intended to be used as a benchmark to compare and review fee-related practices across the industry.
How was the benchmark created?
PEI’s Research & Analytics team surveyed 101 US alternatives fund managers on their fee practices in June and July 2016. We targeted CFOs because they are the most informed of these practices. However, if the CFOs were unavailable, we asked responses from other professionals, including CCOs, IR professionals, and COOs, provided they were aware of the firms’ practices. Next, this is a benchmark covering the US, so we surveyed firms from every region across the country. More than half of all responses came from the north-east; this is reflective of the market due to the private equity hubs of New York, Washington DC, and Boston.
What about confidentiality?
The survey is entirely confidential. No names of the individuals or the firms that responded are revealed.
Why alternatives and not just private equity?
The emphasis is on private equity firms, but other alternatives, such as mezzanine debt, real estate, and infrastructure, have been included. In the case of mezzanine, one can argue that the strategy qualifies as private equity due to the equity options of its investments. Meanwhile, we included real estate and infrastructure because of several of these private equity firms manage as a diversified platform, and, more importantly, much of the scrutiny facing private equity firms is equally placed on other alternative asset classes that we cover.
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