After years of GPs and LPs operating under a standard relationship model, asset managers are beginning to balk under the LP pressure for increased transparency and fee reductions as institutional investors become more aggressive in cutting costs. Gail Mwamba reports.

Apollo Management has become the latest GP to concede to LP demands, after agreeing to a relationship restructuring deal with CalPERS to cut fees equating to $125m over the next five years. The strategic partnership, which the duo said is aimed at aligning interests, will reportedly see Apollo cut 0.2% of its management fees and reduce carried interest by 1.3%. Apollo is estimated to manage about $4.3bn in investments from CalPERS across 11 different funds and is understood to be one of the US pension fund's largest private-equity fund managers.

Although the fee covers current and future fixed income funds that Apollo manages solely for CalPERS, the phenomena is reflective of the broader market trends, as investors grumble over fees paid to their asset managers. Apollo's concession follows a similar move by the Blackstone Group, which last week was reported to be giving 65% in transaction fees back to investors in its latest vehicle, Blackstone VI - instead of the traditional 50%.

"The issue here is not so much fees, but transparency and alignment of interests," says Mounir Guen, CEO of placement agent MVision. "Each business has to be reviewed and adjusted individually – some businesses have to reduce management fees to execute this alignment, while others may have to remove transaction fees. There are a number of other ways in which this can be executed."

However, investors are combing through private equity with a finer tooth comb because, compared to other asset classes, it has historically offered higher returns, and in turn charged higher fees. This was ideal in times of market buoyancy, but with 2009's significant portfolio write-downs and insignificant investment activity, fees have loomed higher. LPs are therefore seeking greater transparency in order to adjust business models in such a way as to cut costs and reduce GP excesses.

Indeed, the issue of transparency was addressed in the Apollo-CalPERS deal, with Apollo agreeing not to use a placement agent in the future sourcing of funds from the LP. This follows reports that Apollo had paid about $50m to a company run by a former CalPERS board member for investments secured from the pension fund.

Industry bodies have also been part of the move to improve transparency and align GP-LP interests, with the British Private Equity and Venture Capital Association (BVCA) last week launching a limited partner advisory unit.

"2009 was a very hard hit year for the investment community, and they need to protect the integrity of their portfolios," concludes Guen. "This is something we are seeing in all asset classes, but private equity is more pronounced because it is a higher return/higher expense business."