"So far we have not had a single problem," Blackstone’s
Friedman reports. "We try to choose our consortium partners based on firms we
know that generally have the same views that we do. Will we experience
significant disagreements among some consortium members in the future? Most
probably. But it hasn’t happened to us yet in any of our consortium deals done
in the past few years." Friedman says different parts of the process can be
farmed out to individual partners–one partner is more responsible for the
"100-day plan," the strategy immediately put in action once control is acquired,
while another might be responsible for asset divestiture plans, and so on.Because the club megadeal is a new phenomenon, it may be
several years until sponsoring consortia engineer liquidity events and observers
can see just how successful they have been. Until then, potential investors in
the funds that pursue them should scrutinize the value-creation rationale behind
every deal, while keeping in mind that the safety element that a big balance
sheet introduces can also stifle returns. And, as with any transaction type,
there is always the chance that a deal will sour. As Jacobs says, "There is no
question that there is going to be some fallout from some bad deal down the
road."
Variations in Management Fees | Fee (percent) | Funds(percent of those in study) | < 1.0 | 3.9 | 1.0 to 1.19 | 3.5 | 1.2 to 1.39 | 2.3 | 1.4 to 1.59 | 15.1 | 1.6 to 1.79 | 5.4 | 1.8 to 1.99 | 0.8 | 2.0 to 2.19 | 43.0 | 2.2 to 2.39 | 5.4 | 2.4 to 2.59 | 16.7 | > 2.6 | 3.9 | Management Fees Versus Fund Size | Fund Size ($ millions) | Average Fee
(percent) | < 50 | 2.07 | 51 — 100 | 2.18 | 101 — 200 | 2.11 | 201 — 500 | 1.94 | 501 — 1,000 | 1.78 | > 1,000 | 1.62 |
The Key Is the Fee
Investors evaluating private equity fund managers should not assume that all fee structures are alike.
Indeed, a report issued in April by UK-based consultancy Private Equity
Intelligence (2006 Fund Terms
Advisor) warned that annual management fees
and performance fees vary widely among funds and can have a substantial effect
on returns.
The consultants, who examined more than 300 private equity
funds worldwide, say that the widely held view that fees are pretty much
standard–a 2 percent annual management fee plus a 20 percent performance levy–is
incorrect, and that some funds can charge as much as a 2.5 percent management
fee plus 25 percent for performance above an agreed rate of return (top
chart).
"While private equity is a higher-return asset class, the expenses are also
high, and you need to have a fairly large portfolio to justify paying them,"
says Franklin Park’s James McGovern. There is some good news for those
considering taking exposure to megadeals, however. The consultants found that
management fees tend to decline as the size of the fund increases, with funds of
$1 billion-plus having average management fees of only 1.6 percent (bottom
chart).
John Ferry is a senior correspondent for Worth.
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