Almost all US funds are switching from deducting carried interest and on a deal-by-deal basis to a European fee model where they earn performance fees based on returns from the entire fund, according to Brendan Tyne, a managing director with private equity and real estate fund administrator Augentius.
Why is the shift towards the European model happening now?
What happened over the last few years in the private equity fund industry is that limited partners gained more of a voice. Compared with the hedge fund world, the private equity side is just starting to catch up. Fund managers know that, to raise capital, they need to make sure they’re treating their LPs fairly.
I think LPs are taking a closer look at the fee structures. It’s an obvious area to go after. Private equity LPs are looking at the hedge fund world and saying, “wait a second, if they can compress fees with those investments, we should take a closer look on our end.”
LPs are the ones that can make the quickest change. Without LPs there are no GPs. If LPs are smart about it, they can exert enough pressure.
How prevalent is the European model currently among US managers?
Almost every new fund being launched right now is following the European model. The only ones with the American model are old funds, or the managers have been around for 20 years or so; ones that are comfortable with the manager, and the fund can still generate returns in the American model. But it’s rare to find an LP that would prefer that model.
Of the new fund launches in the last year or two, I’d say 90-95 per cent are following the European model.
In 5-10 years if you see an American model, it would be like seeing a unicorn.