Segulah’s Urwitz: LPs shouldn’t stand for 2% fee on larger funds

The careful balance between management fees and carried interest, and its obvious implications on alignment of interest, was a recurring feature of the EVCA Investors' Forum – an event bringing together LPs and GPs in Geneva to discuss the current state of the private equity market.

But are changes too slow in the making? "I must say I am surprised that LPs accept the fees charged by larger funds," said Segulah Advisor chairman and founding partner Gabriel Urwitz. "That seems to get away from alignment of interest. I would go towards more interesting ratchet mechanisms on carry and significantly lower the fees."

Co-panellist Elias Korosis, head of strategy at Hermes GPE, agreed that more could be done by investors to accelerate the model's transformation: "The 2% fee was really designed for sub-€500m funds – the picture changes a lot with €1bn+ vehicles. We should therefore exert most of the pressure on fees for larger funds. This has worked so far but maybe we have further to go still."

Panellists at the EVCA Investors’ Forum suggest that the traditional model is ill-suited for larger players

Both Korosis and Urwitz stated that larger funds would have a hard time conforming to the traditional management fees model for much longer given the returns generated in the past few years. "I couldn't say that large-cap funds are going to outperform smaller guys; it might be the case at some point in the cycle, but not in the long run," noted Korosis. Urwitz added: "The larger the funds, the greater the transparency and efficiency in the market, when the mid-market tends to be more inefficient - and private equity has always been about exploiting inefficiencies."

But despite the reservations about mega-funds, most conference participants did not expect private equity's compensation model to be significantly overhauled in the foreseeable future. "I am very happy to pay 2.5% fees if the manager does a good job - this might be a bit much for large buyout funds but perfectly fine for the mid-market," said Jochen Wermuth from family office Wermuth Asset Management. "I'd rather pay the money and ensure interests are aligned. The structure will be hard to reinvent; it was refined over the past 50 years and remains fine."

Co-investments: flavour of the month?

Panellists also discussed another device increasingly used by buyout houses to entice investors, particularly at the larger end of the spectrum: co-investments. "We are seeing a strong interest in co-investments. More investors are trying to access it, and GPs are more eager to accommodate," noted Hamilton Lane managing director Jim Strang, before warning that LPs should remain cautious: "It is a bit like golf: easy to do, but hard to do well."

Elvire Perrin, partner and executive director at Altius Associates, added that while co-investment mechanisms were useful to attract investors at first close, their popularity could be cyclical: "We are witnessing a sort of wave. Things will die down in 5-10 years' time, when investors realise that many of these deals haven't turned out to perform as well as expected."

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• Topics
• Fundraising
• Industry
• EVCA
• Segulah
• Hermes GPE
• Large-cap buyout