Committed capital fees ‘on the way out’

In the next 10 years, half of private equity managers will move to charging only on invested capital, predicts Richard Clarke-Jervoise, a partner at family office Stonehage Fleming.

Charging management fees on capital that limited partners have committed to a fund but has yet to be invested is on the way out.

That was the prediction made by Richard Clarke-Jervoise, head of the private equity team at multi-family office Stonehage Fleming, in an exclusive interview with Private Equity International.

“I would be very surprised if in 10 years’ time much more than 50 percent of the asset class was charging on the basis of committed capital,” Clarke-Jervoise told PEI.

“It’s just such an anomaly within investment management as an industry. There are very good reasons for it, but I just think people will eventually say ‘we’re not prepared to pay for that’.”

Those reasons are, of course, to account for the initial costs of a fund that will only call its capital in increments over a number of years. Nevertheless, Clarke-Jervoise doesn’t see this remaining universally accepted.

Stonehage Fleming looks after more than 250 families with anything from millions to billions. Clients’ wealth comes from various sectors, and increasingly from private equity. “We’ve got a lot of GPs as clients,” Clarke-Jervoise said, “and that’s a growing portion of our client base.”

About 30 of these families invest in private equity through Stonehage Fleming. The firm has three teams covering the asset class: the funds team; the corporate finance team, which helps clients make direct investments; and FPE Capital, a private equity firm with which Stonehage Fleming has an affiliate relationship and which manages funds on behalf of its clients and third-party clients.

For its part, Stonehage Fleming charges its clients a flat fee based on the assets it manages for them, regardless of the types of financial products they’re investing in. The private equity programme charges on the basis of NAV and invested capital, rather than committed capital.

“You can’t get away from the fact that it’s an expensive asset class to access,” Clarke-Jervoise conceded.

“Of course we charge for our services, but we try to avoid the adverse selection you get with a lot of the banks which push product because it’s very profitable for them to do that.”

There is no performance fee. “Philosophically, it was just something the firm felt the clients would struggle to understand and they’re quite resistant to,” Clarke-Jervoise said.

By charging fees only on invested capital, Stonehage Fleming is certainly ahead of the pack; despite prominent members of the industry such as Terra Firma’s Guy Hands speaking out against the practice of charging fees on committed capital, it remains the norm for more than 90 percent of buyout funds and close to 90 percent of growth funds according to recent data from Preqin.

Whether families choose to access private equity through Stonehage Fleming is not simply a matter of size, Clarke-Jervoise said.

“The thing that determines whether they do [private equity] with us or potentially with someone else is really whether they want to invest in the resource to do it themselves,” he noted.

“One of the things that characterises PE compared with all the other asset classes is it is very resource-intensive. People who work in the industry take that for granted and the larger investors typically have dedicated teams covering not only the investing but the reporting, the tax administration, the capital calls and distributions.”

Families, Clarke-Jervoise said, don’t consider the cost in terms of basis points of assets under management. “They look at ‘how much is this costing me? Is it costing me a couple of hundred thousand or is it costing me millions to administer?’.”

The easiest way for wealthy individuals and families to invest in private equity is through feeder funds offered by banks, but “a lot of them say they get a pretty rough deal from the banks who are notoriously hungry for fees”, Clarke-Jervoise said.

Look out for the full interview with Richard Clarke-Jervoise in the September issue of Private Equity International.