Latin Finance - September/October 2010 - 38

private equity fees

PE funds, says he has seen larger Brazilian PE funds slash management fees to as low as 0.7%, although they have kept carries intact at around 20%. The carry is the amount that the fund claims from total profit. Brazilian PE firms are also experiencing pressure from pension funds pushing for management fees to cover only the cost of running them, says Filipe Caldas, vice president of business development in Brazil for LP Capital Dynamics. “They want to know how much it costs the manager to rent the office, hire investment professionals and pay salaries and they are willing to pay for that through a management fee,” he adds And Brazil is not the only country seeing commission compression. “There is pressure from LPs to reduce fees and shops have had to do so to continue working with LPs, generally speaking,” says Gustavo Sintes, managing director at Colombian PE firm TS Capital. “We had to adjust our management fee downward, but we are keeping the carry the same [at around 20%]. We will have to see how negotiations with LPs go,” he says. TS Capital is in cash raising mode for its first fund, for which it expects to raise 220 billion pesos ($110 million). It has teamed up with Advent International to co-invest in Colombian companies operating in the food, beverage, healthcare, retail and telecom sectors. TS Capital will invest an average of $20 million per project, Sintes says.

says Márquez. A first close is expected this year. Of the total to be raised, GEM will contribute 10%. It is shopping the vehicle to investors who have participated in other GEM funds.

funds keep the 2/20 structure when they are raising less than $500 million.”

Transaction Fees Shift

“Particularly for larger funds, there is an intense discussion about transaction fees,” says Lichtner.
Hipotecario will not put in any money, says Márquez, but it will take charge of sourcing deal opportunities in Argentina. The fund will buy 25%-80% of companies in sectors like energy, agribusiness and consumer goods. It does not intend to take 100% control, but will invest $10-$50 million per transaction. Some small funds may even have a chance to increase management commissions since they raise less money. “For a small manager with a 50 million reais fund, the management fee can go up to 3% of the total capital committed,” says Caldas. “Pension funds in Brazil will not mind, as long as the manager can prove that this money is being used completely for the operation of the fund.” “Smaller funds need higher management fees,” says Todaro. “In Brazil,

Raising the Carry

Some PE firms are finding creative ways of dealing with the pressure. Londonbased Global Emerging Markets (GEM), which has about $3.4 billion in AUM, is considering reducing management fees to around 1% but boosting the carry to 25%-30%. When the fund takes profit, GEM will get up to 30%, while LPs get the rest, says managing director and head of LatAm Julio Márquez. GEM is also studying the option of not charging a management fee and instead imposing a 5% closing fee. No other PE firm LatinFinance spoke to said they were implementing this strategy. GEM is joining forces with Argentina’s Banco Hipotecario to set up a fund that is expected to raise as much as $250 million,

Some large funds are keeping traditional fee structures. For example, private equity firm Darby Overseas, which has more than $2.6 billion in AUM, will stick to the traditional structure 2/20 format, says Brazil-based managing director Fernando Gentil. “If your fund size is around $100$300 million, then the 2/20 fee structure can stay,” says Joaquín Avila, managing director of Mexico-based GP EMX Capital, formerly Carlyle. “These funds need the management fee to operate.” But it is not just the 2/20 fee structure that is changing. LPs are also tackling transaction fees, which according to Roex, can yield around 2% of deal value when funds make a purchase. On the sell side, the portfolio company being sold by a PE fund pays commissions to an M&A advisor. “Particularly for larger funds, there is an intense discussion about transaction fees,” Lichtner explains. She describes such fees as “one of the biggest obstacles to alignment [of interests] because they are not very transparent and take money out of deals at a point in time when they haven’t yet produced any tangible results.” “PE managers were adopting an M&A perspective, where they would make the company they acquired pay a transaction fee in the order of 1% of enterprise value to pay for due diligence efforts, lawyers, etc. We argue that this should be covered by the management fee,” Lichtner says. “When PE managers take a transaction fee from the company, they are essentially taking away from cash that could be used to build value for shareholders,” she adds. Lichtner says that now her firm asks PE managers to deduct the transaction fee from the management fee they charge. So, far, she says she has not met resistance. Private equity fund managers may have to bite the bullet, at least as long as LPs remain selective. Lavca statistics show that in 2009, LatAm-focused PE shops raised $3.6 billion, down from $6.4 billion in 2008. The first half revival in fundraising noted by Empea either spells an end to this LP leverage, or suggests that flexibility from GPs on fees is starting to pay off. LF

38 LatinFinance

September/October 2010

Latin Finance - September/October 2010

Table of Contents for the Digital Edition of Latin Finance - September/October 2010