Restoring Clarity to a Muddied Funds Landscape
Pepper Hamilton, a multi-practice law firm that represents private equity clients throughout the life cycle of an investment fund and whose Funds Services Group has represented hundreds of pooled investment vehicles and are well versed in the dynamic and ever-evolving arena of investment industry regulation, recently partnered with PEI, PEF Services and WithumSmith+Brown to conduct a survey of 101 U.S. alternative fund managers to examine fee practices. Coming two years after the first benchmark review, the survey sought to measure the industry sentiment on fees, with a focus on private equity firms, as well as mezzanine debt, real estate and infrastructure.
The goal of the survey – "Fees and Expenses 2016: A PFM Benchmarking Survey" – compares and reviews fee-related practices among fund managers. The survey highlights the challenges faced by fund managers, examining areas such as transparency, compliance, legal and administrative services, and general standard procedures.
This survey comes after the Institutional Limited Partners Association (ILPA) issued a new fee reporting template to bring standardization to the industry and transparency on fees. However, one of the major findings, according to the survey, was that just 17 percent of respondents have plans to implement the new fee reporting template given by ILPA, and 38 percent said there would be no implementation. Thirty percent said they would look into a modified format.
"Similar to the 2014 survey, the 2016 survey is primarily comprised of the lower and middle market," said Julia Corelli, partner and co-chair of Pepper Hamilton's Funds Services Group. "This survey evidences the difficulties that smaller funds have with the current private equity model. The pressures facing middle market managers are not as visible, which is why we need findings produced by surveys like this benchmark review. Seeing it helps managers understand how they can sustainably navigate this challenging business model."
For example, the survey measured the co-investments structure among the firms that offer them. More than 83 percent of respondents said that organizational costs of co-investment vehicles were carried by the co-investors, and only nine percent treated them as transactional expenses. While having the portfolio company bear those costs as transaction expenses would seem fair and logical, since all investors in the portfolio company benefit from it, that is not always easy to negotiate. If the deal breaks and the portfolio company and the fund cannot or will not cover the costs, the fund manager must absorb it within the firm's budget. Such unpredictable expenses are just one of many challenges faced by fund managers today forcing negotiation up front of what the fund may experience over its term, which is usually a decade or more.
Full results of the survey are available here.
Content contributed by attorneys of Troutman Sanders LLP and Pepper Hamilton LLP prior to July 1, 2020, is included here, together with content contributed by attorneys of Troutman Pepper (the combined entity) after the merger date.