Fees win over carry for buyout managers …

A new study by two professors at Penn’s Wharton School lifts the lid on a “secret” of private equity managers. The findings of Wharton professors Andrew Metrick and Ayako Yasuda show that, “on average, leveraged-buyout funds can expect to collect $10.35 in management fees for every $100 they manage, whereas about half that, $5.41 for every $100, comes from carried interest.” Those numbers in total equate to over 15% of funds under management – a big number.

Investors that become aware of this statistic may negotiate more on the terms of management agreements where the GP is given the ability to be on both sides of the table when it comes to negotiating corporate finance fees. It should also encourage a move to more appropriate fee structures in which interests of LP and GP are more closely aligned, such as replacing carry with fund equity and making the management company a subsidiary of the fund.

The 53 page study dated September 9 which was featured in the Wall Street Journal will also hardly help private equity firms with their argument that the pending carried interest bill will damage the buyout industry.


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