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The fee marketplace

The fee marketplace 2008-11-01 Staff Writer <tr><td><b>Number of deals</b></td><td>6</td><td>12</td><td>12</td><td>16</td><td>14</td></tr></table><tr><td>Less than $500 million</td><td&g

Number of deals 6 12 12 16 14 Less than $500 million 14 $342.8 $358.2 $500 million to $1 billion 19 $711.7 $650.0 More than $1 billion 27 $2,403.9 $1,800.0 All transactions 60 $1,387.1 $872.1

Dechert's commentary:
For tables 3-4

A few interesting trends are discernable in these results compared to our 2003 study:

  • ? First, percentage transaction fees on smaller deals appear to have fallen and are now closer to the average percentage transaction fees across all deal sizes. In our 2003 study, the mean percentage transaction fee for deals under $500 million was 1.76 percent, compared to only 1.11 percent for deals between $500 million and $1 billion and the overall average of 1.35 percent for all deals in our 2003 study.
  • ? Second, transaction fees are becoming more standardised with less overall variance. The standard deviation in our 2003 study was 0.64 percent, and only 19 of 32 acquisitions (59 percent) were within .5 percent of the overall mean (compared to 75 percent in our current study).
  • ? Third, as deals have continued to become larger, it appears that percentage transaction fees on the largest deals are decreasing slightly compared to all other deals. In our 2003 survey, the largest deals (more than $1 billion) showed no decrease in percentage transaction fees compared to the overall averages, and in fact were higher on a percentage basis than mid-size deals (1.35 percent to 1.11 percent). Our current survey shows a decline in percentage transaction fees for the largest deals compared to all other deals (1.01 percent vs. 1.24 percent).
  • Less than $500 million $0.5 $7.5 $4.5 $4.1 $500 million to $1 billion $2.0 $13.0 $8.3 $10.0 More than $1 billion $0.6 $75.0 $24.4 $20.0 All transactions $0.5 $75.0 $14.6 $10.0 Less than $500 million 0.23% 2.96% 1.35% 1.23% $500 million to $1 billion 0.28% 2.00% 1.16% 1.26% More than $1 billion 0.03% 2.89% 1.01% 1.02% All transactions 0.03% 2.96% 1.14% 1.07% Less than $500 million $0.10 $3.05 $1.33 $1.05 $500 million to $1 billion $0.25 $3.0 $1.39 $1.25 More than $1 billion $1.0 $10.0 $3.74 $2.5 All transactions $0.10 $10.0 $2.44 $2.0 Less than $500 million 0.93% 5.19% 2.41% 2.00% $500 million to $1 billion 0.19% 4.05% 1.59% 1.40% More than $1 billion 0.46% 3.52% 1.48% 1.08% All transactions 0.19% 5.19% 1.73% 1.40%

    A few additional observations:

  • ? In some cases, the management agreement provided for the management fee to be calculated as a percentage of actual or budgeted EBITDA. However, in these cases, the fee provision always included a floor (e.g., ?the greater of $1 million or 2 percent of EBITDA?). Interestingly, unlike our 2003 study, none of the fees calculated in this manner contained a cap or collar?thus allowing for much greater potential fees as EBITDA rises (subject to any restrictions on payment set forth in the portfolio company's credit facilities).
  • ? Management agreements typically continue until the expiration of a term (regularly 5?10 years) or until the buyout firm ceases to hold a specified level of equity ownership. The initial public offering is usually not a termination event, but in some cases the buyout investor terminated the agreement in connection with the offering for a significant one-time fee. This is consistent with our 2003 study.
  • ? At least one buyout firm covered by our survey requires its portfolio companies to prepay the monitoring fee at the time of the acquisition for all or a significant portion of the term of the management agreement. More typical payment schedules are either annually or quarterly, payable in advance or in arrears.