Investors seek balance of power

The Oregon Investment Council (OIC) has published guidelines to try to boost its bargaining positioning in its relationship with investment managers. Furthermore, there are signs these guidelines may become a template for institutions across the US.

The OIC, which manages a portfolio worth more than $56 billion, is careful to point out that the guidelines are only that – a set of principles the pension will use when considering a commitment to an investment manager. They are not intended to be policy to which the pension must adhere absolutely.

As part of the draft principles, GPs will be asked to reduce management fees and take carry only after 100 percent of capital, net of all fees and expenses, has been returned to the investor which has provided the vast majority of the risk capital.

GPs should avoid charging transaction, monitoring and other fees to a portfolio company. Fees earned by the GP should offset management fees and partnership expenses during the life of the fund and at the end of the fund's life, the guidelines state.

The guidelines attempt to give limited partners more say over a fund, especially in calling for a majority of LPs to have the power to terminate a commitment period, remove a general partner or dissolve a fund.

The OIC move comes less than two months after Utah Retirement Systems released its own set of guidelines for hedge fund terms. The $16 billion fund proposed that management fees cover only operating expenses, performance fees should be paid at the end of a lock-up period and managers provide weekly return estimates and updates on how well investments are performing.

Such demands will probably not be confined to these two states, as other public pensions have expressed interest in seeing the OIC's draft and using it as a template for their own guidelines. While some GPs just a few months ago professed to be unconcerned about having to deal with issues such as management fee relief, investors seem to be pushing back faster than anticipated.

“One of the natural questions from LPs is going to be, ‘okay, you can't get any deals done this year – why am I paying you a management fee?’” said a partner with an investment group that has committed funds to more than 200 managers. “That's kind of a third-rail issue, and I wouldn't be surprised if it becomes a deal point in fundraising. I think it is reasonable for LPs in a new fund to have some questions about whether there should be management-fee relief.”

Meanwhile, LP representatives such as the Institutional Limited Partners Association (ILPA) and UK-based Private Equity Investors Association (PEIA) are being more proactive in pushing their members' concerns. Joseph Dear, the chief investment officer for the California Public Employees' Retirement System (CalPERS), said during a recent conference that managers who could previously dictate terms to limited partners are not in the same position of strength in today's economy.

“Now is the time for limited partners to take advantage of that and begin conversations about alignment of interests that truly make sense for the long haul,” he said.

Several firms are already taking steps to appease their LPs, with TA Associates cutting its carry fee to 20 percent, TPG reducing its management fees by one-tenth and HgCapital lowering its management fees for its sixth fund to 1.75 percent. While no funds have yet agreed to permanently lower fees, more may have to consider a fee renegotiation.

Managers which weren't expecting push-back on fees may need to start getting a plan ready to deal with demands from an increasingly organised and proactive investor base.