Pepper Hamilton, Private Equity International Announce Results from Third Benchmark Survey to Review Industry Practices
Pepper Hamilton, a multi-practice law firm that represents fund clients throughout the life cycle of an investment fund, announced the results of the 2018 pfm Fees and Expenses Benchmarking Survey, produced in partnership with PEF Services and WithumSmith+Brown. Launched in 2014, the benchmarking survey interviews U.S. alternative fund managers to learn more about fee practices, seeking to measure industry sentiment against the backdrop of a push by the Securities and Exchange Commission for increased disclosure of fees and expenses.
The purpose of the survey is to serve as a biennial comparison and review of fee-related practices among fund managers. In this year’s survey, one of the most significant themes reveals that general partners are becoming more selective in what they charge to the fund, partly due to the intense emphasis placed on fulsome disclosures of fees and expenses by the SEC.
The responses in the report shed light on the increased pressure to take a more transparent approach to fees and expenses policies. The demand for greater transparency has forced many general partners to change their limited partnership agreements to provide more details of fees and expenses. In fact, the survey revealed that 38 percent of GPs revised their limited partnership agreements following a visit by the SEC, and 40 percent changed their valuation policies.
“Limited partnership agreements are getting longer, and everything is becoming more granular,” said Julia Corelli, partner and co-chair of Pepper Hamilton’s Funds Services Group. “Managers are being required to bear more and more expenses that used to consistently be fund expenses. To avoid being caught with an unauthorized expense, expense provisions in fund documents are becoming longer and more detailed.”
One of the more interesting revelations in the 2018 survey is whether the fund should pay the expenses when the deal is not completed. Results showed a 5 percent drop since 2016 in the number of firms that charge all broken deal expenses to the fund, and a 5 percent increase in funds that have all broken deal proceeds going to the fund. In addition, only 19.8 percent of respondents provide broken deal recoveries to the management company first so that it can recoup broken deal expenses. This year’s survey also showed a 9 percent increase in the expectation that co-investors will bear a portion of broken deal expenses.
Despite the increased demand for transparency, generally speaking, the pendulum still remains in favor of GPs.