A new study from the audit and risk advisory services team at KPMG has found a high level of resentment at the management fees and carried interest levied by GPs.
Overall, the survey found that 56 per cent of LPs felt they received value for money from their GPs compared to 44 per cent who did not. But only 20 per cent said management fees were good value and none at all were happy with carried interest arrangements.
When asked what could be done to make the industry a better place to invest, the biggest area of concern was ‘level of management fees’, followed by ‘level of carried interest entitlements’ and ‘reporting on fund performance to investors’. LPs were least worried about ‘reporting on fund performance to the world at large’ and ‘reporting to the world at large on returns to the manager’.
The three major reasons for choosing a GP were cited as ‘capacity of management to add value’, ‘quality of people’ and ‘track record’. The least important reasons for investing were ‘quality of the reporting process’ and ‘the identity of other limited partners’.
Despite LP unease at fund terms, GPs have done little to appease them. A recent strategy by Strategic Capital Management (SCM), the Zurich-based private equity fund manager, found that the average fee of 2.5 per cent for venture funds and 1.8 per cent for buyout funds has shown no sign of coming down since the firm began compiling data in 1998. Carried interest has also remained static at an average 20 per cent.
The survey did find, however, that fund-of-funds managers often provided lower fees, rebates for large commitments and flexibility in the combination of management fee and carried interest.