Welcome gestures

Some fund managers would do well to follow the lead of TPG, which will voluntarily return $20m in fees given lower deal volumes, writes Amanda Janis.

Industry types' favourite topic to wax lyrical about these days is which private equity firms will come swimmingly out of the downturn, and which will become dead weight or simply sink into the abyss.

Most frequently people point to troubled deals as the basis for such opinions, which one industry insider recently dismissed as idle gossip that is “emotionally driven rather than rationally driven”.

Strikingly absent from such speculation is how firms have treated limited partners during this difficult economic period – a factor that should not be underestimated in terms of winning LP support for future funds.

Amanda Janis

Take TPG, for example. Back in December it became one of the first firms to allow investors – many of whom were plagued with liquidity issues and might have had difficulty honouring capital calls – to reduce commitments to funds it had already raised. It lowered management fees by one-tenth for everyone, regardless of whether they took up its offer to cut commitments. And it also promised LPs it would not call more than 30 percent of LPs’ commitments in 2009 unless the action was approved by TPG’s LP advisory committee.

Now, the firm has gone one step further, telling LPs it will return roughly $20 million in fees collected this year on its sixth global buyout fund, according to a source familiar with the matter.

“We took this proactive step in order to share the economic cost of a deal market that has been slower than anyone anticipated,” James Coulter, TPG co-founder, said during its recent annual investors' meeting. Roughly 85 percent of the fund, closed in September 2008 and later reduced to $18.8 billion, is un-deployed, according to a Wall Street Journal article that first reported the firm's decision to return fees.

The source told PEO that TPG was not asked by LPs to return fees, but was doing so because it felt it was “the right thing to do”. It was not a response to any deals gone wrong, the Wall Street Journal report noted.

Still, such gestures can go a long way – particularly when miscalculation of risk has resulted in losses for the portfolio, such as the $1.3 billion in equity TPG saw wiped out when US bank Washington Mutual was seized by regulators.

It also assuages some of the LP fee-backlash that has been brewing, and in some cases has been particularly directed at mega-firms. 

Many firms would do well to follow TPG’s lead, that is, listen to investors’ needs and, if appropriate, revise terms to ensure a continued alignment of interests.

As Dominique Senequier, founder and chief executive of AXA Private Equity, recently said at an industry conference,  private equity has no future without LPs.