Despite increasing downward pressure on fund costs incurred by private equity investors, the traditional 20 percent carried interest won’t be going away, Blackstone’s global head of private equity Joseph Baratta said Tuesday.
As the industry has become increasingly competitive with more capital chasing deals, some general partners have been providing flexible fee structures for investors. Those examples include lower management fees than the typical 2 percent level.
“But for managers that deliver what they promised, there’s a stable fee relationship,” Baratta told the audience at the Barclays Global Financial Services Conference in New York. “And 20 percent carry is not under threat if you’re delivering returns in the mid-teens. But if returns are below that, yeah, you’ll have carry pressure.”
He added that Blackstone Capital Partners VII, which closed on $18 billion in December, will generate more fee-related income than its predecessor, BCP VI, which closed on $16.2 billion in January 2012.
The fund also features a simpler and more transparent fee structure – a change driven by limited partners seeking greater clarity in their LPAs, which Baratta said reflects a general industry trend.
According to documents from the Oregon Public Employees Retirement Fund, BCP VII offers “a lower than market management fee, a standard carry, an 8 percent preferred return, and a 100 percent management fee offset”. This includes fee incentives for LPs committing early or large amounts, the document said.
Here are three other takeaways from Baratta’s comments:
• A large growth in commitments to private equity has come from sovereign wealth funds and family offices in Asia and the Middle East, as well as from pension plans and government-sponsored programmes in Latin America.
• Blackstone will likely invest more in energy in the next few quarters than in recent past. Other sectors the private equity giant is eyeing include healthcare and pharma, which Baratta said are undergoing a “radical change”; tech and enterprise software, where he said there is a transformation of revenue models; and transportation and logistics.
• Deployment of capital will become smoother as prices come down. “I do expect a secular shift in valuations with private equity multiples coming down from all-time highs,” he said.
Blackstone, which sits on $43 billion of dry powder, manages $356 billion in assets, according to PEI data.