"Our private equity staff has worked particularly hard at squeezing out every nickel," said Brad Pacheco, public information officer for CalPERS, which has $19.45 billion in private equity and $154.2 billion in total assets. "And our size helps."
The average fee was 98.5 basis points, compared to 122.5 basis points charged to its peers. However, these numbers did not include CalPERS' $2.9 billion California Emerging Ventures program managed by Grove Street Advisors, which invests smaller commitments in smaller buyout and venture capital partnerships. In a report from CalPERS' alternatives consultant, Pension Consulting Alliance Inc., Encino, Calif., Grove Street estimated its average management fee was 145 basis points.
Controlling the cost of the private equity program is a priority with the CalPERS' investment committee because those fees represent more than 40% of CalPERS' total investment management fees, according to the report.
Officials at the $103.2 billion CalSTRS, Sacramento, also have seen fee reductions lately, said Kirsten MacIntyre, public information officer.
So far, five or six of the 50 general partners with whom CalSTRS' invests have reduced their fees for the $5.1 billion in private equity investments, she said. The concessions "were part of the monitoring process and the ongoing dialogue that we have with our managers," she said.
Oregon state treasury officials have been able to negotiate better terms this year for the $37 billion fund's $3.8 billion private equity program, said Ron Schmitz, chief investment officer. Without going into specifics, he said that transaction fees have been one of the sources of better terms.
"Limited partners have been in a better position than they were three, four, five years ago in terms of supply and demand. Generally, there has been a little more room for a conversation," Mr. Schmitz said. But he cautioned, "A good deal in fees is in the eye of the beholder."
Moreover, instead of taking their share of profits as they are earned, many funds — like Hicks Muse's Europe II fund, which is in the midst of raising €1 billion — are not taking their fees until the limited partners are paid, said sources close to the fund raising. These managers are subordinating their carry — or incentive fees — to the returns of their limited partners because limited partners worry whether the general partner will be willing or able to pay back profits if they turn out to be more than the agreed incentive fee, known as clawback.
While this is standard for Europe funds where fees are richer, the sources said Hicks, Muse executives are talking about offering similar terms when it launches its next similarly sized U.S. fund in 2005 or 2006. And they are expected to have lots of company.
"I know that some GPs and large LPs have contemplated significant reductions … I think there is a reasonable expectation that it will happen within the next one to two years," said Mr. Dominguez. One example: carried interest costs (or performance-based fees) dropping to 10% of profits from 20%.
A general partner "who wanted carried interest of 20% does not have a prayer," said a buyout manager who declined to be identified for this article. "Limited partners are becoming very proactive. … LPs are asking more questions and pushing back more than in the early 1990s."
Among private equity firms, not many will cut their carry or incentive fees, Ropes & Gray's Mr. Rowe said. But many are returning their limited partners' contributed capital in advance of taking their performance fees, he said. What's more, general partners are sharing 80% of their outside fees with limited partners, up from the standard 50/50 split. Outside fees include broken deal, monitoring and transaction charges. Hicks Muse is going so far as to offer limited partners 100% of transaction fees it earns for selling portfolio companies in its Europe II fund, sources said.
"The objective of the LPs is not to drive fees as low as possible," said Thomas Dorr, managing director of Morgan Stanley Alternative Investment Partners, a Philadelphia-based fund-of-funds manager.
"What limited partners are concerned about is where the fee stream has ballooned so that general partners are highly compensated independent of performance. Private equity only works where there is intense alignment of interest."
Some private equity managers also are offering side deals for larger institutional investors, offering better terms and fees.