15 years of PEI: Then and now

The contents page of our first issue contains many topics that will be familiar to our readers today. We look back at what we said then, and examine how the industry has moved on in the intervening 15 years.

In 2001, LPs were fighting for access to basic information. Today, the quest for greater clarity is far from over.

The push for transparency at the turn of the century was largely prompted by limited partners demanding greater visibility when distributions had all but dried up in the midst of a recession.

Investors were seeking some of the most basic information from general partners, including fund performance and returns, how internal rates of return were calculated, or even how much of their commitment had been drawn and how much had been distributed.

This type of information is now readily available to LPs.

“Performance, IRR information is standard,” says Brendan Tyne, managing director at Augentius in New York.

With several large GPs such as Blackstone and the Carlyle Group now listed, details are easily accessible online through regulatory filings. The private equity industry is less private than it used to be.

“For better or for worse, private equity is complicated and a lot of education was needed. Transparency has certainly increased,” says David Scopelliti, senior vice-president at Alcentra, which is part of BNY Mellon.

But the quest for more information is far from over. LPs continue to search for more visibility in their investments, in large part to justify the high cost of investing in the asset class.

Since the financial crisis and the Dodd-Frank Act, which requires fund managers to register with the SEC, the regulator has begun its own focus on transparency centred on areas such as fee and expense allocation or potential conflicts of interest.

The search for lucidity has by no means disappeared, but it has become more in-depth. “It’s kind of like peeling an onion,” Scopelliti says.

When tough market conditions start hitting returns, LPs question what their fees are paying for.

“Fees are driven by the market. They reach the level of whatever the market will bear.”

So said Ivan Vercoutère, managing partner of LGT Capital Partners in an interview with PEI on fees in 2001. And he has been proved right as the balance of power has swung back and forth between investors and fund managers.

In 2001’s bear market, investors were starting to ask what exactly their fees were paying for. As managers’ funds increased from $300 million to $600 million to $1.5 billion, fee levels resolutely stayed the same.

Today, management fees are the most heavily negotiated point in a limited partnership agreement, says law firm MJ Hudson, which noted that LPs expect “at a minimum, to see detailed budgets to justify fees being charged to ensure that GPs are not unduly enriched from charging excessive management fees”.

Despite pressure from LPs, fund managers appear to have maintained the status quo. Research from law firm Proskauer found more than two-thirds of private equity firms have kept their management fees for new funds at the same level as their previous fund.

The consensus across the industry is that we’re on the cusp of yet another big fall: delivering 2.5x and a 20 percent IRR is becoming increasingly difficult.

This means more pressure on fees. Speaking at the BVCA Forum in London in October, CVC Capital Partners investor relations partner Marc St John said GPs must justify the very high cost of the asset class through strong returns to investors every time they raise a fund.

“If we can’t do that… you’re going to have to lower your prices.”


Intense negotiations around allocation of expenses were making the headlines in 2001, and fee structures are scarcely less contentious today.

One of the perennial topics around private equity funds is their fee structures. Typically, funds charge their limited partners a 2 percent management fee on committed capital.

In 2001, PEI wrote less obvious elements of the management fee calculation could be the focus of intense negotiations. Those could include GP employee salaries, operational expenses, and fees paid to service providers, such as consultants, lawyers, and placement agents.

Those debates are ongoing today, as there’s no industry-wide standard or guidance on who covers what. Even as the industry matures and LPs become more demanding on limited partnership agreements, investors still overwhelmingly pay for the expenses incurred in some areas of running a private equity firm.

A survey on expenses conducted by PEI sister title pfm found most GPs with more than $5 billion in assets under management allocated accounting and legal costs to LPs. Almost 70 percent of managers charged funds for meals and entertainment at their annual general meetings. But that isn’t necessarily wrong – as long as GPs can make the case LPs are the ultimate beneficiaries.

“It comes down to [GPs] marketing to the LPs and whether they are comfortable with the allocations, and are willing to pay them because they want to be invested with that particular GP. It becomes a marketing issue in fundraising – how is your competition handling these items compared to how you are handling them?” says Tom Angell, partner at accounting and consulting firm WithumSmith+Brown.

Our first Deal Mechanic focused on the transaction's financing. Now, leverage is a dirty word.

We featured the £2.14 billion (around $3 billion in 2001’s money) buyout of yellow-pages supplier Yell by Apax Partners and Hicks, Muse, Tate & Furst in our initial Deal Mechanic. It’s a marked example of how the industry has been forced to change in the intervening years.

“The two private equity firms, who were equal partners, were quick to see that here was a business that could sustain significant leverage, even though banks were already turning other private equity deals away,” we wrote then, before detailing the exact make-up of the capital structure.

Our most recent Deal Mechanic, which you can find on p. 42, doesn’t mention leverage at all. Instead, the emphasis is on value creation, operational improvements and buy-and-build strategies. In fact, several of the portfolio companies which featured in Deal Mechanic in the last 18 months have had to work hard to undo the damage done by pre-2008 capital structures.

The days of buying a business, leveraging it to the hilt and selling at a hefty profit are long gone.

Structural changes and government deregulation have helped Asia mature into a key market.

Private equity deals in China, Japan and South Korea dominated Asia 15 years ago. From semiconductor companies to banks and golf courses, investment in East Asian companies was all the rage when PEI printed its first issue.

Fifteen years on, the region has become an increasingly important destination for foreign capital as a result of structural changes after the 1997 Asian financial crisis, buyout opportunities brought about by business restructuring and government deregulation and the opening up of markets such as Vietnam and Indonesia.

But private equity investors who previously poured money into banks and chipmakers have now set their sights on hotter sectors. The internet space – from enterprise software to e-commerce platforms – is seeing a surge of interest from private equity. Last year, a record $36 billion was invested in internet-related deals and another $15 billion in technology companies, Bain & Co reported. Investors have also bought into Asia’s consumer story, driving an increase in media, healthcare, education and financial services deals.


Today’s low interest rates and cheap debt make for a more favourable dealmaking environment than 2001, but the competition means it’s still tough to put capital to work.

At the end of 2001, US buyout firms were cash-rich. After the 90s’ high valuations, multiples had come down to earth with a thud.

But dealmaking was slow because debt was available in smaller quantities and at lower multiples of earnings than in the previous few years. Firms had to contribute more equity to a deal’s capital structure, affecting returns.

Now GPs are sitting on an even larger pile of cash against a different backdrop. After the global financial crisis, interest rates have remained low and credit markets are favourable.

“In the early 2000s, dealflow was definitely not as robust as today,” says Jeff Lovell, co-chairman of private equity firm Lovell Minnick Partners. “We were able to get financing, but terms, particularly post-9/11, were less favourable than they are today.”
He recalls cashflow multiples 15 years ago were about 20 percent less than those today, but sees a stronger dealflow.

FFL Partners co-founder and managing partner Spencer Fleischer agrees. “There had been a tech bubble, and companies had been highly leveraged, so after the burst, dealflow dried up; not a lot was happening in 2001,” Fleischer says. “The Fed was pressing banks to cut back on cashflow lending, and when debt is relatively hard to get, dealflow is weak.”

Although deal pipelines and financing are “massively better”, the industry has become so much more competitive, it’s harder to find opportunities that are truly proprietary, Fleischer argues.
“You have to do more work identifying what you want to buy early. That means getting to know the companies, and management teams well before a company it comes to market.”