While investors and consultants are putting pressure on money management firms to justify the fees charged on committed capital, there are times when charges are acceptable, sources said.
A number of factors should be considered before an investor deems charges as unjustifiable, such as the strategy and how long the manager has been investing.
“It depends on the type of private market strategy,” said Nicholas Ridgway, head of investment research in London at Buck Consultants. “Take private infrastructure — a lot of heavy lifting goes into sourcing a deal, making sure it is accretive to what they are looking to source, and there is a lot of analysis in it. If (the manager does not charge) on committed capital, they probably cannot pay those people to work there.”
Sanjay Mistry, director of private debt and private equity fund of funds at Mercer Investment Consulting in London, agreed that private markets managers need capital behind them in order to identify and source investments in the first place.
“There is a cost associated with this function. The challenge is that there are some structures with a supply and demand imbalance — with a lot of capital chasing a fund, leading to capacity issues, leaving investors with less influence to challenge the status quo.”
Likewise, an investor might be more willing to pay charges on committed capital to a manager that is new to the private markets and has not raised any funds in the past.
“Managers justify charging fees on committed capital because it takes time to find an initial deal – you cannot just invest immediately as in public markets,” said Luba Nikulina, London-based global head of manager research at Towers Watson & Co. “Early funds and emerging managers, you can make the case that the fee is on committed capital” because those are the only fees they would be immediately accruing.
But those sympathies are unlikely to extend to managers who have raised billions of dollars in previous funds. “This is where the whole value proposition becomes dubious for investors still having to pay charges to private equity managers on committed capital,” said Ms. Nikulina.
Guy Hands, chairman and chief investment officer at London-based Terra Firma Capital Partners Ltd., agreed: “The reality is that anyone who has been in the industry 20 years, if they are good, has made a lot of money, and they can do this,” he said.
