Carlyle: GPs and LPs have reached ‘equilibrium’ over fees

That’s because private equity firms are increasingly transparent with LPs about the fees they charge, Carlyle’s co-founder and co-CEO David Rubenstein said during a second-quarter earnings call with analysts.

Fees have long been a thorny subject for investors in private equity funds, but “an equilibrium” has now been reached between GPs and LPs, co-founder and co-CEO of The Carlyle Group David Rubenstein said during an earnings call with analysts on Wednesday.

The Washington, DC-based private equity firm reported its second-quarter results July 27.

“I think there’s always going to be…pressure from people paying fees,” Rubenstein said during the call. But this pressure has abated over time because GPs are increasingly transparent about the fees they charge, Rubenstein added.

“I want to say that the general partners have been much more, I should say, transparent about what the fees are than they’ve ever been before and I think that’s a good thing,” he said in the call.

The long-standing debate over fees intensified last April, when the country’s largest public pension fund, the California Public Employees’ Retirement System (CalPERS), admitted during an investment committee meeting that it had not been tracking the performance fees paid out to its private equity fund managers. LPs typically pay a management fee of 2% of the fund – which goes toward salaries and other business expenses – plus a performance fee of 20 percent of the realised profits after a “hurdle rate”, or a fixed rate of return threshold, has been met.

CalPERS’s acknowledgement that it had failed to keep track of the performance fees it paid to buyout firms sparked a media firestorm. In November, following heavy criticism in the press, the pension fund published data outlining that it has paid $3.4 billion in profit sharing to its general partners since 1990.

During the call with analysts, Rubenstein highlighted a major change in fees that has taken place since the 2008 financial crisis. In the pre-crisis years, when private equity fundraising was at its height, it didn’t matter how early an LP committed to a fund, or how much the LP was willing to offer: all investors were subject to the same fees. These days, large investors – who are among the first to invest in a fund – have begun to receive modest discounts. That’s true of investors in other alternative asset classes like hedge funds, where the standard “2 and 20” fee structure has declined to something more like “1.4 and 17,” according to The Economist.

“I think there’s an equilibrium now, and people recognise [that] getting into better funds is going to require some challenges on the part of some investors,” he said during the call. “I think they are accepting pretty much what’s being proposed by GPs… I don’t think any undue fee pressure is likely to come at this point forward.”

In its private equity business, Carlyle realised $4.03 billion from 46 investments across 23 funds in the second quarter ended 30 June. In the same period, it invested $1.42 billion via 16 transactions through 12 funds for private equity.

Private equity distributable earnings were $235 million for the quarter, up from $105 million in the previous quarter, but down 32 percent from $345 million in the same quarter last year. Total private equity assets under management as of the second quarter was $57.6 billion, down 5.7 percent from $61.1 billion in the first quarter and down 9.4 percent from $63.6 billion in the second quarter of 2015. The drop from the previous quarter was due to $2.2 billion in outflows such as distributions, partially offset by the $300 million fundraised, Carlyle said in its earnings report.

Overall, Carlyle’s net income for the second quarter was $6 million, or 7 cents per diluted common share, down 27 percent from $8.4 million in the first quarter and down 80 percent from $30.6 million in the same period last year. Carlyle attributed this decrease to two factors. One was a $15 million increase in income taxes, caused by a larger amount of its net performance fees being subject to income tax this quarter. The other $10 million is attributed to lower catch-up management fees and lower net performance fees, the firm said in the earnings report.