Analysis

The irrelevance of fees

Source: unquote | 06 Nov 2012
Standard management fees for large-cap funds remain controversial

LPs are not forced to back private equity, they choose to – fees and all. Kimberly Romaine questions the impact of LP rants.

There has been much debate over industry fees since the BVCA's annual summit, where Sandra Robertson of Oxford University Endowment Management used her speaking slot to criticise the industry, suggesting the inflated fees were not justified by returns, which currently mirror those of the FTSE 250 or a bond index, yet with none of the liquidity. Indeed Carlyle's William Conway Jr had said just minutes earlier that returns would be lower in years to come owing to the market malaise that is hampering growth and lending.

It's not just private equity struggling to maintain performance; last week, hedge fund guru Geoff Grant, of Goldman pedigree, wrote to investors to say he no longer had an "edge" in today's market and so would wind the fund up. The announcement came just weeks after emerging markets investor Greg Coffey stepped out of the investment spotlight aged just 41. And within private equity, some big names are bowing out: CVC chairman Michael Smith stepped down last week.

Is the golden age behind us, with all the sacrosanct industry luminaries heading for the exit to escape an apocalypse of downward-spiralling returns and beefed-up fees to compensate the heavy-lifters?

No.

But now more than ever it is about fund manager selection. GPs should sell themselves more, and the industry less. This is particularly true for venture, but increasingly so for buyout funds. Yes, the bottom performers lose investors lots of money, and charge for the privilege. But the averages and means are brought up by vehicles very deserving of capital and whose fees are justified by the queues of investors trying to get in. It is basic supply and demand. Even Robertson paid lip-service to this small group.

The Endowment Robertson manages was itself scrutinised by a 2010 article in The Independent, suggesting the fees charged (just under £700,000 paid by its colleges in 2009 – roughly equal to her compensation that year, according to the article) may have been overzealous given the fact £50m had been lost that year. She declined to comment, other than to say the article had been withdrawn.

The true intention of Robertson's diatribe will only ever be fully known by her; it's certainly cast the spotlight on her on the day itself as well as weeks after, with a handful of letters published in the FT. But LPs that whinge about fees should only be taken seriously when they no longer accept investment proposal meetings.

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