Fees: The new waive

In March, Connecticut-based secondaries specialist Newbury Partners held a final close on $1.1 billion for its third fund. The vehicle had gone to market in summer 2013 with $1 billion hard cap – the same amount that it had raised for its previous fund, which closed in 2010.

The marketing process, led by MVision, was a swift one, highlighting the global LP demand for secondaries firms with strong track records. The capital was raised primarily from existing investors, with 60 percent of total commitments coming from outside North America, and Newbury managing partner Richard Lichter said in a statement that the firm was extremely happy with the speed of its fundraise.

The fund’s stated strategy was no different to the previous one (as the fund size suggests): to target privately negotiated, small- and mid-sized transactions ranging from $1 million to $50 million in size.

What was unusual, however, was that after the first close, Newbury voluntarily waived LPs’ management fees for the first four or five months. It had done the same with its 2010 vehicle, too, and for the same reason: it raised the new fund so quickly that it didn’t have time to finish spending the previous one. When Fund II hit a first close (at which point it could have begun collecting management fees on committed capital), Fund I was only about 80 percent deployed. With Fund III’s first close, Fund II was only about 85 percent deployed.

“You hope fundraising takes a year, sometimes it takes longer – but we had our first closing in 30 days [for Fund II] and [it was] even quicker for Fund III,” Lichter told PEI’s sister title Secondaries Investor recently.

So the waiver meant LPs who re-upped weren’t paying fees on two funds at once. Lichter suggests that since investors had been so generous on the fundraising trail, the firm wanted to reciprocate that goodwill. And charging fees when Newbury wasn’t actually deploying the new fund would have been unfair, he says. “I didn’t want to reward that quickness [with which LPs had made commitments] by then charging the LPs money.”


It’s an admirable position – and a pragmatic one, since it saves the firm having to deal with disgruntled LPs. Which prompts the question: will we see other secondaries firms also offering this sort of fee holiday, particularly in this hot fundraising market?

Erica Berthou, a partner at Debevoise & Plimpton, argues that while the concept isn’t an entirely new trend, nor unique to Newbury, it’s by no means common these days.

However, LPs have been pushing much harder for this kind of arrangement, she says. “Investors are becoming smarter; they are more careful in understanding when the new fund will start investing, and making sure they don’t pay management fees during an inactive period.”

One large LP indicated that in an ideal world, funds would take this one step further by moving to a model where investors only ever pay fees on invested rather than committed capital – a concept that remains relatively uncommon in private equity.

Either way, it may be the last time we see Newbury take this route. The firm has said that it will wait until Fund III is 95 percent invested before it goes back to market with Fund IV – so when it gets its new fund, it can start investing it straight away.