Long-standing private equity investor Georges Sudarskis made some frank remarks about fund managers and return expectations in emerging markets at the PEI Emerging Markets Forum. He called the 1 or 2 percent management fees paid by investors “unacceptable”.
Recalling a friend who also invests in private equity, he said: “When I hear my friend is paying $580 million in fees for relatively lousy returns – that hurts.” Sudarskis rebutted claims by GPs that management and transaction fees pay for costs accrued when investing in companies. He said LPs would never object to sharing the costs, but would object when GPs are making money from them.
Fees calculated as a percentage of commitments without any relation to costs – now that is
He suggested that GPs begin to address the question of fees and come to a more suitable arrangement. Management fees that are calculated in connection with costs were suggested as a more attractive alternative. Sudarskis said, “fees calculated as a percentage of commitments without any relation to costs – now that is unacceptable.”
Sudarskis also urged the audience to be realistic about returns. He called GPs’ projection of 20 or 30 percent returns “bollocks”, and offered a more realistic alternative of 10 to 13 percent return as more likely. He predicted this type of return over 10 to 15 years would generate great wealth accretion of around 140 times. He added that anything below a 6 percent return would be considered too low.
Sudarskis was adamant in yesterday’s interview that LPs “can never be too diversified.” He spoke as a “proponent of diversification”, saying, “You need hundreds, if not thousands of portfolio companies to be properly diversified.”
When asked whether it was possible to achieve diversification by only committing to top quartile managers, he said “top quartile funds are a myth.” This echoed the sentiments of Carlyle Group co-founder David Rubenstein, at the BVCA Summit last month that “every fund seems to be a top quartile fund”.
The most important thing, suggested Sudarskis, is to have more firms, more funds and more managers to make sure you don’t miss out on anything good. However, it is critical that you “wean out the bottom performers”.
In 1998, Sudarskis set up the sovereign fund of the Emirate of Abu Dhabi, the Abu Dhabi Investment Authority, where he built a private equity portfolio that is now one of the biggest globally. He was bullish about emerging markets, having been a “pioneer” in the field, investing in emerging economies from the beginning.
This is where the world of investment is going
He said yesterday, “This is where the world of investment is going”, and when asked what he’d change if he did it all again, he said he would increase his investment allocation to emerging markets.