Pressure on fees unsustainable, warns Terra Firma’s Hands

"Some of the largest LPs are trying to get something for nothing," warned Hands during a Q&A session following his keynote speech to open the Private Equity Exchange conference. "They expect to have a very talented group of people doing a lot for them, and get a lot of co-investment opportunities as well, while paying them as little as possible.

"This is not a sustainable model."

Hands was answering a question relating to his predictions for the private equity industry 10 years from now, adding that this state of affairs would continue for some time and could have a negative impact on returns.

"You'll get a significant number of GPs willing to do lots of co-investments and manage separate accounts at very low fees. It is hard to say whether or not these investments will do very well, and I don't think these managers will care."

The debate surrounding fees was later rekindled as part of a panel offering insight from several private equity leaders. Sven Liden, CEO of limited partner Adveq, justified higher fees for first-time funds (due to set-up costs) or smaller vehicles. He also added that future fee levels would remain dependent on the fundraising balance of power, but that the LP position was oftentimes justified.

"Pressure on fees will not happen with successful managers, except at the larger end of the market," said Liden. "You see some large venture funds making millions from fees alone before making a single investment, and that's not right. But it's hard to challenge if the GP is successful."

Opportunities in tough times
Terra Firma's Hands also shared his views on the current European private equity market as part of his keynote, warning that the new post-crash paradigm was here to stay: "The current macroeconomic malaise is not set to last for just another couple of years, but at least a couple of decades. It is difficult knowing where to invest, but if you don't invest correctly returns will be miniscule.

"This is a gloomy position to be in, but private equity has to remember it has a significant advantage: it can focus on the micro level, carefully picking businesses to invest in. I always say it is better to invest in a good company in a 'bad' country than the other way around.

"There are some fantastic opportunities out there in Europe, with some potential sellers such as banks finally starting to let go of assets that haven't had the impetus or the resources to reach their full potential. Private equity can make a difference there."

Hands nevertheless told the audience to remain aware of the broader political context: "Private equity is certainly better understood compared to the 2007 days. But there is a growing feeling from the general public that it hasn't benefited from the growth generated in past decades. Private equity will be part of a general feeling among the masses that they have been somewhat conned over the last few years."

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