The push for lower fees has led some of the largest institutional investors, including public pension plans and sovereign wealth funds, to push for separate accounts. They are widespread for hedge fund backers, or those who want to invest in real estate or hedge funds, so why not private equity?
“For all the talk, it really hasn’t happened that much,” says Bob Brown, managing director at Advent International, who’s responsible for investor relations worldwide. “Separate accounts are few but widely reported.”
Among those to have made headlines are Texas Teachers’ $3 billion mandates to Apollo and KKR, and Chinese sovereign wealth fund CIC’s $500 million accounts with Lexington Partners and Goldman Sachs for secondaries deals.
Nonetheless, most observers see the biggest investors continuing to push for special treatment.
For the LP, the attractions are obvious: lower management fees and carried interest payments. But for the GP, the risks and rewards need to be carefully weighed. “It can be divisive,” said Jeff Eaton, of Eaton Partners. “And ultimately the GP is making the decision whether they risk upsetting some smaller investors. Is it worth that risk?”
Advent, which raised €8.5 billion for a new buyout fund last year, resisted demand from investors for separate accounts. But while most firms would prefer all investors in one fund paying the same premium terms, the draw of a large cheque to give a fund momentum in the early days – or to get it over the line – can be hard to resist.
“I would like to think people give a nod to what is right and fair, but it’s what makes the market – and it’s down to the GP to say if they will cut rate-card and carry to get the fundraising home,” said George Anson, managing director at fund of funds manager HarbourVest Partners.
While hardly popular among most investors, there’s a growing acceptance that this will happen, he adds.
“A lot of smaller investors realise that GPs are at a disadvantage and they can’t blame them for wanting to strike a different deal with bigger investors.”