Trailblazing Oregon

Oregon Investment Council’s fee stipulations have led the way among US pensions in demanding concessions from fund managers.

The Oregon Investment Council continues to prove that taking a tough stance on fund terms will not necessarily alienate you from GPs.

This week, the $65 billion pension got The Blackstone Group to agree to an 80/20 transaction fee split with a slight increase in the management fee. It’s unclear how much the management fee would go up under the new transaction fee split. Oregon agreed to commit $200 million in Fund VI.

The original terms on Blackstone’s Fund VI allowed LPs to use 65 percent of the transaction fee to pay down the management fee, known as an offset. The fund has a 1.5 percent management fee on commitments up to $7.5 billion, 1 percent of commitments above $7.5 billion and afterward, .75 percent of invested capital.

Because Blackstone offered the new fee arrangement to Oregon, the firm is going back to all Fund VI LPs with the new deal.

Blackstone, however, is just the latest in a growing list of managers to give in to Oregon’s demands.

In May, Oregon squeezed a fee break out of another private equity firm – Aquiline Capital Partners – as it negotiated a $100 million commitment to the fund. Aquiline, which was looking to raise $2 billion for its second financial services fund, agreed to transfer 100 percent of transaction fees back to the fund. The firm's first fund sent 80 percent of deal fees back to the fund.

Oregon also received fee reductions from Lone Star Funds, a Texas-based firm that Oregon has invested in for several years. Oregon made a $400 million commitment to Lone Star’s two new funds last year after the firm altered its fee structures and governance procedures to make the funds more “LP friendly”.

Last year, Oregon and the Washington State Investment Board won concessions out of another private equity firm – Fisher Lynch Capital – in exchange for a $500 million commitment. Oregon approved a $500 million commitment to Fisher Lynch Capital Co-Investment Partnership II, which was targeting $1 billion from only two LPs, Oregon and the Washington State Investment Board.

One concern is that LPs who demand too many concessions, like those asked for by the Institutional Limited Partners Association, will find themselves left out of quality funds.

Officials at smaller institutions have told PEM they just don't have the kind of leverage like that of the bigger institutions like the California Public Employees' Retirement System, which can negotiate much harder for lower fees. Smaller pension officials have said they are happy when they are able simply to get into a fund run by a well-known GP.

Still, as Oregon has proven time and again, a long term commitment to the asset class, and a track record of being a dedicated partner, go a long way to getting more favorable terms.