Fees and Expenses 2014 - Pepper Hamilton
Fees and Expenses 2014 A Benchmarking Survey with pfm
Anne Anquillare, Julia D. Corelli, Mark Heil, Gregory J. Nowak December 18, 2014
Introduction •
Survey of 104 U.S. alternative fund managers to examine their fee practices conducted by pfm in August and September 2014
•
All answers broken out by assets under management and the fund strategy including buyout, growth equity, debt and real asset
•
Results released in November 2014 edition of pfm.
2
Demographics What type of investment firm best describes your firm below?
What is the total value of the firms asset’s under management? 7%
12% 10%
40%
13%
Buyout Growth equity Debt Real Asset Other
17%
Less than $1bn $1bn to $2bn 57%
20%
$2bn to $5bn More than $5bn
24%
What is the size of your most recently closed fund (i.e., no longer raising capital)?
Where is your firm headquartered?
Midwest 19%
19%
16%
Less than $100m
9%
$100m to 500m
17%
$500m to $1bn 46%
13%
13%
More than $1bn
3
Northeast Southeast Southwest
49%
West
Question 1 Your firm is visited by the SEC or state regulator for a routine regulatory examination and you enlist a law firm or consultant to help guide you through the process. Who pays the legal or consulting fees? Fund 8%
Management firm
Split between both fund and firm 6%
14%
9% 18%
67% 83% 78%
67%
100%
93%
83%
100%
68%
82%
33% 14% Total
20%
17% 7%
Less than $1bn $1bn to $2bn
$2bn to $5bn
More Than $5bn
11%
14%
Buyout
Growth equity
Strategy
AUM
4
9% Debt
Real Asset
Other
Question 2 Say the exam leads to a deficiency finding around valuations. You decide to redo the last two quarters’ reports and deliver the new ones along with an explanatory letter to your limited partners. Who pays for the accounting and legal costs in getting through this correction process? Fund 11%
14%
6%
Management firm
Split between both fund and firm
7%
11%
8%
14%
9%
42% 61%
57%
67%
60%
67% 56%
78% 73%
64%
50% 29%
Total
29%
28%
Less than $1bn $1bn to $2bn
33%
33%
33% 23%
$2bn to $5bn More Than $5bn
Buyout
22%
Growth equity
Strategy
AUM
5
Debt
Real Asset
18% Other
Question 3 An individual principal within your firm is the subject of an inquiry from the SEC which could have potential criminal or civil sanctions. He protests innocence and settles without admission of liability. Does your fund provide indemnification for his costs?
No
Yes
46% 54%
6
Question 3 cont. If the answer to Question 3 is yes, how do you determine which fund bears which proportion of the indemnification to him?
Across all funds 19%
21% To all funds which are affected by the activity which was the subject of the inquiry regardless of whether the subject principal was the one who performed the activity
4%
To the fund where the subject principal spends most of his time
2%
To the most recent fund
To those funds on which he works 54%
7
Question 4 In proportion to time the subject principal (or others) spent on the subject activity In proportion to the capital commitments to each fund
How would you do the previous allocation?
15%
20%
In proportion to the AUM of each such fund.
10% 21%
29%
20% 33%
50%
44%
46%
50%
60%
42%
33%
50%
47% 33%
50% 36%
Total
38%
50%
38%
37%
30%
Less than $1bn $1bn to $2bn
AUM
$2bn to $5bn
More Than $5bn
8
Buyout
50%
33%
33%
Growth equity
Strategy
Debt
Real Asset
Other
Question 5 When deal partners sit on a portfolio company board, does the company pay them director fees? No
21%
20%
13% 22%
Yes
17% 28%
11%
9%
89%
91%
Real Asset
Other
23%
100% 79%
Total
80%
87% 78%
Less than $1bn $1bn to $2bn
AUM
83% 72%
$2bn to $5bn
More Than $5bn
9
Buyout
77%
Growth equity
Strategy
Debt
Question 6 Who pays the partners travel expenses associated with attending portfolio company board meetings? Fund
Management firm
Portfolio company
45%
50%
55%
60% 74%
67%
77%
82%
88%
94% 17% 36% 27% 27%
12%
14% Total
13% 10% Less than $1bn
33% 12%
9% 18%
13%
$1bn to $2bn $2bn to $5bn
33% 18%
9%
6% More Than $5bn
Buyout
Growth equity
Debt
Strategy
AUM
10
Real Asset
Other
Question 7 A successful bolt-on acquisition is made to a portfolio company that earns the management firm a $1,000,000 transaction fee from the deal which it shares through a management fee offset with the fund. A third party investment banker fee for the same transaction would have been, under customary market terms, $3,000,000. What is the offset you would apply to the management fee as a result of the management firm's receipt of the transaction fee? 17% 44%
43%
33%
2%
12%
12%
11%
16%
Total
100% of $1,000,000
17%
22%
11%
42% 60%
68%
75%
17%
6%
19% 10% 13%
5%
50% 39%
27%
Less than $1bn
50% of $1,000,000
17%
50% 31%
We have ceased to charge transaction fees because of recent SEC pronouncements. 80% of $1,000,000
3% 67%
3%
We have never charged transaction fees like this.
20% $1bn to $2bn $2bn to $5bn
AUM
58%
14%
13%
14% More Than $5bn
11
Buyout
30%
13%
Growth equity
Strategy
Debt
Real Asset
Other
Question 8 How do you treat the administrative services/monitoring fee which the management company collects on sale of the portfolio company which has been accruing since the investment was made? Not subject to management fee offset
Subject to management fee offset
We do not collect such fees
11% 28% 40%
33%
40%
45% 60%
64%
58% 75%
78% 50%
67% 51%
52%
45% 33%
9%
8%
Total
Less than $1bn
32% 17%
6%
7%
$1bn to $2bn $2bn to $5bn
More Than $5bn
25% 11% Buyout
5%
8%
9%
Growth equity
Debt
Real asset
Strategy
AUM
12
33%
Other
Question 9 At the annual meeting who pays for the travel and accommodation of CEOs of… …existing portfolio companies? Fund 3%
Management firm
51%
57%
21%
13%
24%
26%
30%
29%
Total
Less than $1bn
Split between both fund and firm
7%
6% 41%
Portfolio company from which the CEO came
53%
67%
27%
17% 17%
13%
$1bn to $2bn $2bn to $5bn
More Than $5bn
56% 15%
45% 18%
10%
14%
60%
57%
29%
36%
10% 20%
14% 14%
Buyout
Growth equity
Debt
Real Asset
55% 36% 9% Other
Strategy
AUM
…prospective portfolio companies? Fund
Management firm
5% 32%
3% 33%
38%
44%
41%
38%
19%
23%
Total
23%
Less than $1bn $1bn to $2bn
Portfolio company from which the CEO came 7% 36% 50%
7% $2bn to $5bn
33% 17% 50% More Than $5bn
26%
5% 38%
44%
38%
33%
19%
22%
Growth equity
Debt
37% 37% Buyout
Strategy
AUM
13
Split between both fund and firm 17% 33%
44%
50%
56%
Real Asset
Other
Question 10 At the annual meeting, who pays for the travel and accommodation of the firms… …current limited partners? 1%
Fund
Limited partner 7%
11%
8%
6%
66%
71%
67%
22%
21%
28%
Total
Less than $1bn $1bn to $2bn
Management firm 6% 67%
69%
80%
13% $2bn to $5bn
Split between both fund and firm
77%
9%
11%
73%
67%
33%
26%
23%
18%
22%
More Than $5bn
Buyout
Growth equity
Debt
Real Asset
20%
70%
10% Other
Strategy
AUM
…prospective limited partners? 2% 27%
27%
68%
71%
2% Total
Fund
Limited partner
13%
8% 15%
81%
6% 2% Less than $1bn $1bn to $2bn
AUM
77%
$2bn to $5bn
Management firm 31%
40%
69%
60%
More Than $5bn
14
Buyout
Split between both fund and firm 11%
18%
14% 44%
78%
77%
86% 56%
5% Growth equity
11% Debt
Strategy
Real Asset
Other
Question 11 At the annual meeting, who pays for the meals and entertainment (i.e., golf, tennis) of the CEOs of… …existing portfolio companies? Fund 9% 19% 40% 32% Total
9% 20% 42% 29%
Management firm 24% 29%
20%
20%
27%
20%
47%
47%
Less than $1bn $1bn to $2bn
Portfolio company from which the CEO came
7% $2bn to $5bn
9% 21% 29%
60%
41%
More Than $5bn
Buyout
Split between both fund and firm
14%
22%
19%
14% 29%
9% 18%
38%
56%
29%
22%
14%
18%
Growth equity
Debt
Real Asset
Other
43%
55%
Strategy
AUM
…prospective portfolio companies on which diligence is being performed? Fund 7% 19%
56%
19% Total
8% 15%
62%
15%
Management firm 20%
Portfolio company from which the CEO came 7% 29%
47% 50% 33%
Less than $1bn $1bn to $2bn
AUM
3% 20% 20% 20% 40%
14% $2bn to $5bn
17%
More Than $5bn
15
Split between both fund and firm
10%
13%
24%
50%
Buyout
13%
17%
25%
67%
50%
75%
48% 30%
17%
19%
13%
Growth equity
Debt
Strategy
13% Real Asset
Other
Question 12 At the annual meeting, who pays for the meals and entertainment of the… …current limited partners? Fund 10% 5%
13% 20%
36%
54%
Total
6% 6% 22%
13% 6%
31%
Management firm
67%
45%
67%
Less than $1bn $1bn to $2bn
$2bn to $5bn
AUM
Split between both fund and firm 20% 20%
60%
More Than $5bn
14% 6% 23%
57%
Buyout
The limited partner
5% 5% 19%
10% 60%
33%
40% 33%
71%
Growth equity
10%
30%
33%
Debt
Real Asset
50% Other
Strategy
…prospective limited partners? Fund 20% 5% 61%
19% 5% 63%
14%
14%
Total
Less than $1bn
20%
Management firm 29%
Split between both fund and firm 20%
7% 67%
13%
43%
80%
21%
$1bn to $2bn $2bn to $5bn
28% 3% 59% 9%
More Than $5bn
AUM
16
Buyout
The limited partner
15% 5% 55%
29% 78%
11% 11%
14% 67% 57%
25%
22%
Growth equity
Debt
Strategy
11% Real Asset
Other
Question 13 Who pays the cost for firm partners to attend private equity industry conferences (i.e., conference tickets, travel) in which they expect to… ...learn economic trends, legal and accounting issues? Fund 2%
2%
90%
91%
7% Total
Management firm
Split between both fund and firm 3%
6%
83%
83%
100%
11% 8% Less than $1bn $1bn to $2bn
$2bn to $5bn
AUM
5% 75%
94%
86%
17%
3%
9%
More Than $5bn
Buyout
Growth equity
25% Debt
89%
100%
11% Real Asset
Other
Strategy
...meet CEOs of suitable target companies? Fund 4%
4%
6%
74%
76%
65%
22%
20%
29%
Total
Less than $1bn
Management firm
9%
86%
14%
$1bn to $2bn $2bn to $5bn
AUM
Split between both fund and firm
67%
63%
77%
75%
33%
29%
23%
25%
More Than $5bn
Buyout
Growth equity
Debt
17
Strategy
88%
100%
13% Real Asset
Other
Question 14 After meeting at an industry conference, a partner takes a target company CEO out to lunch. Who pays the tab? Fund 2% 1%
Management firm
6%
Portfolio Company
Split between both fund and firm 5%
7% 17%
13%
10%
75%
80%
13%
10%
Real Asset
Other
56% 68%
67%
33%
61%
75%
71% 87%
50% 28%
33%
44%
33%
25%
24% 7%
Total
Less than $1bn $1bn to $2bn
$2bn to $5bn
More Than $5bn
Buyout
Growth equity
Strategy
AUM
18
Debt
Question 15 During due diligence and before any letter of intent is signed, the firm hires lawyers, consultants, accountants and other service providers to begin drafting their transaction documents. Who pays for these expenses? If the deal closes? Fund
1% 54% 7%
Management firm
Reimbursed by the portfolio company
Split between both fund and firm
2%
11% 50%
61%
29%
Total
Less than $1bn
50%
50%
59%
69%
15%
8%
38%
46%
50%
8% 50%
38%
$1bn to $2bn $2bn to $5bn
AUM
More Than $5bn
18%
42%
31%
23%
Buyout
Growth equity
Debt
22%
33% 11%
67%
Real Asset
56% Other
Strategy
If the deal does not close? Fund 1% 8%
2% 6%
34%
39%
57%
53%
Total
Management firm 17% 11%
72%
Less than $1bn $1bn to $2bn
AUM
Reimbursed by the portfolio company 8%
17%
28%
46% 83% 46% $2bn to $5bn
14%
More Than $5bn
19
58%
Buyout
Split between both fund and firm 8%
9% 18%
50% 73% 42% Growth equity
Debt
Strategy
11% 44%
56%
Real Asset
44%
44% Other
Question 16 After a letter of intent is signed, the firm hires lawyers, consultants, accountants and other service providers to begin drafting detailed transaction documents. Who pays for these expenses? If the deal closes: Fund 2% 57% 4% 36% Total
Management firm
Reimbursed by the portfolio company
Split between both fund and firm
2% 65% 4% 29% Less than $1bn
56%
50%
50%
22% 59%
72%
7% 44%
50%
43%
$1bn to $2bn $2bn to $5bn
More Than $5bn
40%
67%
9% 28%
32%
8% 25%
Buyout
Growth equity
Debt
10%
78%
Real Asset
50% Other
Strategy
AUM
If the deal does not close: Fund 2% 8% 22%
2% 12% 22%
68%
65%
Total
Less than $1bn
Management firm 11% 6% 83%
Reimbursed by the portfolio company 43% 100% 57%
$1bn to $2bn $2bn to $5bn
AUM
More Than $5bn
20
Split between both fund and firm
11% 14%
5% 14%
75%
82%
Buyout
Growth equity
25% 17%
44%
10% 40%
58%
56%
50%
Debt
Real Asset
Other
Strategy
Question 17 After a definitive agreement is signed, the firms financing team and the portfolio company CFO negotiate financing for the deal. Who pays legal fees incurred by the lender? If the deal closes: Fund
Management firm
Reimbursed by the prospective portfolio company
Split between both fund and firm
1% 70%
76%
2% 27%
2% 22%
Total
61%
77%
81%
83%
67%
76%
8%
39%
Less than $1bn $1bn to $2bn
23%
17%
19%
24%
25%
$2bn to $5bn
More Than $5bn
Buyout
Growth equity
Debt
AUM
57%
57%
43%
43%
Real Asset
Other
Strategy
If the deal does not close: Fund
1% 18%
16%
16%
16%
65%
Total
69%
28% 6%
67%
Management firm 15% 23%
62%
Reimbursed by the prospective portfolio company 14%
33%
14%
67%
Less than $1bn $1bn to $2bn $2bn to $5bn More Than $5bn
15% 10%
25% 17%
71%
75%
Buyout
Growth equity
21
38% 13%
29% 14%
58%
50%
57%
Debt
Real Asset
Other
Strategy
AUM
Split between both fund and firm
Question 18 If you answered yes to the previous question, if the firm ceases to pay them the retainer would you offset the operating partners cash directors fee against the funds management fee?
Assume an operating partner on retainer with your firm joins a portfolio company as an independent director. Would you offset the operating partners cash director fee against the funds management fee?
No
Yes
No
Yes
33% 49%
51% 67%
22
Question 19 If you answered yes to the previous question, what is the amount of the offset?
Would you offset any equity options that the portfolio company grants to this operating partner (for services as an independent portfolio company director) against the fund management fee?
No
Net cash received from the option shares at exit from the investment Value at time of exercise
Yes
Value at time of grant
37%
32%
48%
68%
15%
23
Question 20 If the portfolio company pays consulting fees to the operating partners company and the operating partner owns 25 percent of the consulting firm, would you offset the consulting fees paid to the consulting business against the management fee? Not at all 24% 19%
7% 33%
Yes, in the amount of 25% of the fees 8%
36%
15% 15%
60%
20%
Total
48%
Less than $1bn
57%
AUM
55%
18%
70% 44%
40%
$1bn to $2bn $2bn to $5bn
11% 33%
33%
22%
22%
92% 57%
Yes, in total
More Than $5bn
Buyout
67%
67%
Real Asset
Other
27%
Growth equity
Debt
Strategy
Would knowing what the consulting firm actually pays the operating partner make any difference to you? No 28%
72%
Total
39%
61%
Less than $1bn
14%
86%
8%
92%
$1bn to $2bn $2bn to $5bn
AUM
Yes 11%
25%
89%
75%
More Than $5bn
24
Buyout
28%
50%
72%
50%
Growth equity
Debt
Strategy
33% 67% 67% 33% Real Asset
Other
Moderator: Gregory J. Nowak • Partner in the Philadelphia and New York offices of Pepper Hamilton LLP • Practice leader for hedge funds of the firm’s Funds Services Practice Group
212.808.2723 [email protected]
• Concentrates his practice in securities law, particularly in representing investment management companies and other clients on matters arising under the Investment Company Act of 1940 and the related Investment Advisers Act of 1940 • Represents many hedge funds and other alternative investment funds in fund formation, investment and compliance matters, including compliance audits and preparation work. 25
Speaker: Julia D. Corelli
215.981.4325 [email protected]
• Partner in the Philadelphia office of Pepper Hamilton LLP • Co-chairs Pepper’s Funds Services Group and also serves the firm as vice chair of its Executive Committee and co-chair of its Commercial Department • Concentrates in private investment fund formation, operations and compliance, private equity investment transactions, venture capital investments, acquisitions, dispositions and financings of business enterprises, joint ventures, and intra-partner dealings. • Also is experienced in matters of investment fund principal compensation and succession planning and serves as general outside counsel to family offices. 26
Speaker: Mark Heil • Executive Vice President of Business Development of PEF Services • Has worked with private equity firms since 1994 • Prior to joining PEF Services, he founded CereNova Fund Marketing LLC, a boutique thirdparty marketing firm that provided capital raising and marketing services primarily to early stage venture, growth capital, mezzanine, venture debt and buyout funds. 212-203-4679 [email protected]
27
For more information visit www.pepperlaw.com and www.pefundservices.com
28
Anne Anquillare, Julia D. Corelli, Mark Heil, Gregory J. Nowak December 18, 2014
Introduction •
Survey of 104 U.S. alternative fund managers to examine their fee practices conducted by pfm in August and September 2014
•
All answers broken out by assets under management and the fund strategy including buyout, growth equity, debt and real asset
•
Results released in November 2014 edition of pfm.
2
Demographics What type of investment firm best describes your firm below?
What is the total value of the firms asset’s under management? 7%
12% 10%
40%
13%
Buyout Growth equity Debt Real Asset Other
17%
Less than $1bn $1bn to $2bn 57%
20%
$2bn to $5bn More than $5bn
24%
What is the size of your most recently closed fund (i.e., no longer raising capital)?
Where is your firm headquartered?
Midwest 19%
19%
16%
Less than $100m
9%
$100m to 500m
17%
$500m to $1bn 46%
13%
13%
More than $1bn
3
Northeast Southeast Southwest
49%
West
Question 1 Your firm is visited by the SEC or state regulator for a routine regulatory examination and you enlist a law firm or consultant to help guide you through the process. Who pays the legal or consulting fees? Fund 8%
Management firm
Split between both fund and firm 6%
14%
9% 18%
67% 83% 78%
67%
100%
93%
83%
100%
68%
82%
33% 14% Total
20%
17% 7%
Less than $1bn $1bn to $2bn
$2bn to $5bn
More Than $5bn
11%
14%
Buyout
Growth equity
Strategy
AUM
4
9% Debt
Real Asset
Other
Question 2 Say the exam leads to a deficiency finding around valuations. You decide to redo the last two quarters’ reports and deliver the new ones along with an explanatory letter to your limited partners. Who pays for the accounting and legal costs in getting through this correction process? Fund 11%
14%
6%
Management firm
Split between both fund and firm
7%
11%
8%
14%
9%
42% 61%
57%
67%
60%
67% 56%
78% 73%
64%
50% 29%
Total
29%
28%
Less than $1bn $1bn to $2bn
33%
33%
33% 23%
$2bn to $5bn More Than $5bn
Buyout
22%
Growth equity
Strategy
AUM
5
Debt
Real Asset
18% Other
Question 3 An individual principal within your firm is the subject of an inquiry from the SEC which could have potential criminal or civil sanctions. He protests innocence and settles without admission of liability. Does your fund provide indemnification for his costs?
No
Yes
46% 54%
6
Question 3 cont. If the answer to Question 3 is yes, how do you determine which fund bears which proportion of the indemnification to him?
Across all funds 19%
21% To all funds which are affected by the activity which was the subject of the inquiry regardless of whether the subject principal was the one who performed the activity
4%
To the fund where the subject principal spends most of his time
2%
To the most recent fund
To those funds on which he works 54%
7
Question 4 In proportion to time the subject principal (or others) spent on the subject activity In proportion to the capital commitments to each fund
How would you do the previous allocation?
15%
20%
In proportion to the AUM of each such fund.
10% 21%
29%
20% 33%
50%
44%
46%
50%
60%
42%
33%
50%
47% 33%
50% 36%
Total
38%
50%
38%
37%
30%
Less than $1bn $1bn to $2bn
AUM
$2bn to $5bn
More Than $5bn
8
Buyout
50%
33%
33%
Growth equity
Strategy
Debt
Real Asset
Other
Question 5 When deal partners sit on a portfolio company board, does the company pay them director fees? No
21%
20%
13% 22%
Yes
17% 28%
11%
9%
89%
91%
Real Asset
Other
23%
100% 79%
Total
80%
87% 78%
Less than $1bn $1bn to $2bn
AUM
83% 72%
$2bn to $5bn
More Than $5bn
9
Buyout
77%
Growth equity
Strategy
Debt
Question 6 Who pays the partners travel expenses associated with attending portfolio company board meetings? Fund
Management firm
Portfolio company
45%
50%
55%
60% 74%
67%
77%
82%
88%
94% 17% 36% 27% 27%
12%
14% Total
13% 10% Less than $1bn
33% 12%
9% 18%
13%
$1bn to $2bn $2bn to $5bn
33% 18%
9%
6% More Than $5bn
Buyout
Growth equity
Debt
Strategy
AUM
10
Real Asset
Other
Question 7 A successful bolt-on acquisition is made to a portfolio company that earns the management firm a $1,000,000 transaction fee from the deal which it shares through a management fee offset with the fund. A third party investment banker fee for the same transaction would have been, under customary market terms, $3,000,000. What is the offset you would apply to the management fee as a result of the management firm's receipt of the transaction fee? 17% 44%
43%
33%
2%
12%
12%
11%
16%
Total
100% of $1,000,000
17%
22%
11%
42% 60%
68%
75%
17%
6%
19% 10% 13%
5%
50% 39%
27%
Less than $1bn
50% of $1,000,000
17%
50% 31%
We have ceased to charge transaction fees because of recent SEC pronouncements. 80% of $1,000,000
3% 67%
3%
We have never charged transaction fees like this.
20% $1bn to $2bn $2bn to $5bn
AUM
58%
14%
13%
14% More Than $5bn
11
Buyout
30%
13%
Growth equity
Strategy
Debt
Real Asset
Other
Question 8 How do you treat the administrative services/monitoring fee which the management company collects on sale of the portfolio company which has been accruing since the investment was made? Not subject to management fee offset
Subject to management fee offset
We do not collect such fees
11% 28% 40%
33%
40%
45% 60%
64%
58% 75%
78% 50%
67% 51%
52%
45% 33%
9%
8%
Total
Less than $1bn
32% 17%
6%
7%
$1bn to $2bn $2bn to $5bn
More Than $5bn
25% 11% Buyout
5%
8%
9%
Growth equity
Debt
Real asset
Strategy
AUM
12
33%
Other
Question 9 At the annual meeting who pays for the travel and accommodation of CEOs of… …existing portfolio companies? Fund 3%
Management firm
51%
57%
21%
13%
24%
26%
30%
29%
Total
Less than $1bn
Split between both fund and firm
7%
6% 41%
Portfolio company from which the CEO came
53%
67%
27%
17% 17%
13%
$1bn to $2bn $2bn to $5bn
More Than $5bn
56% 15%
45% 18%
10%
14%
60%
57%
29%
36%
10% 20%
14% 14%
Buyout
Growth equity
Debt
Real Asset
55% 36% 9% Other
Strategy
AUM
…prospective portfolio companies? Fund
Management firm
5% 32%
3% 33%
38%
44%
41%
38%
19%
23%
Total
23%
Less than $1bn $1bn to $2bn
Portfolio company from which the CEO came 7% 36% 50%
7% $2bn to $5bn
33% 17% 50% More Than $5bn
26%
5% 38%
44%
38%
33%
19%
22%
Growth equity
Debt
37% 37% Buyout
Strategy
AUM
13
Split between both fund and firm 17% 33%
44%
50%
56%
Real Asset
Other
Question 10 At the annual meeting, who pays for the travel and accommodation of the firms… …current limited partners? 1%
Fund
Limited partner 7%
11%
8%
6%
66%
71%
67%
22%
21%
28%
Total
Less than $1bn $1bn to $2bn
Management firm 6% 67%
69%
80%
13% $2bn to $5bn
Split between both fund and firm
77%
9%
11%
73%
67%
33%
26%
23%
18%
22%
More Than $5bn
Buyout
Growth equity
Debt
Real Asset
20%
70%
10% Other
Strategy
AUM
…prospective limited partners? 2% 27%
27%
68%
71%
2% Total
Fund
Limited partner
13%
8% 15%
81%
6% 2% Less than $1bn $1bn to $2bn
AUM
77%
$2bn to $5bn
Management firm 31%
40%
69%
60%
More Than $5bn
14
Buyout
Split between both fund and firm 11%
18%
14% 44%
78%
77%
86% 56%
5% Growth equity
11% Debt
Strategy
Real Asset
Other
Question 11 At the annual meeting, who pays for the meals and entertainment (i.e., golf, tennis) of the CEOs of… …existing portfolio companies? Fund 9% 19% 40% 32% Total
9% 20% 42% 29%
Management firm 24% 29%
20%
20%
27%
20%
47%
47%
Less than $1bn $1bn to $2bn
Portfolio company from which the CEO came
7% $2bn to $5bn
9% 21% 29%
60%
41%
More Than $5bn
Buyout
Split between both fund and firm
14%
22%
19%
14% 29%
9% 18%
38%
56%
29%
22%
14%
18%
Growth equity
Debt
Real Asset
Other
43%
55%
Strategy
AUM
…prospective portfolio companies on which diligence is being performed? Fund 7% 19%
56%
19% Total
8% 15%
62%
15%
Management firm 20%
Portfolio company from which the CEO came 7% 29%
47% 50% 33%
Less than $1bn $1bn to $2bn
AUM
3% 20% 20% 20% 40%
14% $2bn to $5bn
17%
More Than $5bn
15
Split between both fund and firm
10%
13%
24%
50%
Buyout
13%
17%
25%
67%
50%
75%
48% 30%
17%
19%
13%
Growth equity
Debt
Strategy
13% Real Asset
Other
Question 12 At the annual meeting, who pays for the meals and entertainment of the… …current limited partners? Fund 10% 5%
13% 20%
36%
54%
Total
6% 6% 22%
13% 6%
31%
Management firm
67%
45%
67%
Less than $1bn $1bn to $2bn
$2bn to $5bn
AUM
Split between both fund and firm 20% 20%
60%
More Than $5bn
14% 6% 23%
57%
Buyout
The limited partner
5% 5% 19%
10% 60%
33%
40% 33%
71%
Growth equity
10%
30%
33%
Debt
Real Asset
50% Other
Strategy
…prospective limited partners? Fund 20% 5% 61%
19% 5% 63%
14%
14%
Total
Less than $1bn
20%
Management firm 29%
Split between both fund and firm 20%
7% 67%
13%
43%
80%
21%
$1bn to $2bn $2bn to $5bn
28% 3% 59% 9%
More Than $5bn
AUM
16
Buyout
The limited partner
15% 5% 55%
29% 78%
11% 11%
14% 67% 57%
25%
22%
Growth equity
Debt
Strategy
11% Real Asset
Other
Question 13 Who pays the cost for firm partners to attend private equity industry conferences (i.e., conference tickets, travel) in which they expect to… ...learn economic trends, legal and accounting issues? Fund 2%
2%
90%
91%
7% Total
Management firm
Split between both fund and firm 3%
6%
83%
83%
100%
11% 8% Less than $1bn $1bn to $2bn
$2bn to $5bn
AUM
5% 75%
94%
86%
17%
3%
9%
More Than $5bn
Buyout
Growth equity
25% Debt
89%
100%
11% Real Asset
Other
Strategy
...meet CEOs of suitable target companies? Fund 4%
4%
6%
74%
76%
65%
22%
20%
29%
Total
Less than $1bn
Management firm
9%
86%
14%
$1bn to $2bn $2bn to $5bn
AUM
Split between both fund and firm
67%
63%
77%
75%
33%
29%
23%
25%
More Than $5bn
Buyout
Growth equity
Debt
17
Strategy
88%
100%
13% Real Asset
Other
Question 14 After meeting at an industry conference, a partner takes a target company CEO out to lunch. Who pays the tab? Fund 2% 1%
Management firm
6%
Portfolio Company
Split between both fund and firm 5%
7% 17%
13%
10%
75%
80%
13%
10%
Real Asset
Other
56% 68%
67%
33%
61%
75%
71% 87%
50% 28%
33%
44%
33%
25%
24% 7%
Total
Less than $1bn $1bn to $2bn
$2bn to $5bn
More Than $5bn
Buyout
Growth equity
Strategy
AUM
18
Debt
Question 15 During due diligence and before any letter of intent is signed, the firm hires lawyers, consultants, accountants and other service providers to begin drafting their transaction documents. Who pays for these expenses? If the deal closes? Fund
1% 54% 7%
Management firm
Reimbursed by the portfolio company
Split between both fund and firm
2%
11% 50%
61%
29%
Total
Less than $1bn
50%
50%
59%
69%
15%
8%
38%
46%
50%
8% 50%
38%
$1bn to $2bn $2bn to $5bn
AUM
More Than $5bn
18%
42%
31%
23%
Buyout
Growth equity
Debt
22%
33% 11%
67%
Real Asset
56% Other
Strategy
If the deal does not close? Fund 1% 8%
2% 6%
34%
39%
57%
53%
Total
Management firm 17% 11%
72%
Less than $1bn $1bn to $2bn
AUM
Reimbursed by the portfolio company 8%
17%
28%
46% 83% 46% $2bn to $5bn
14%
More Than $5bn
19
58%
Buyout
Split between both fund and firm 8%
9% 18%
50% 73% 42% Growth equity
Debt
Strategy
11% 44%
56%
Real Asset
44%
44% Other
Question 16 After a letter of intent is signed, the firm hires lawyers, consultants, accountants and other service providers to begin drafting detailed transaction documents. Who pays for these expenses? If the deal closes: Fund 2% 57% 4% 36% Total
Management firm
Reimbursed by the portfolio company
Split between both fund and firm
2% 65% 4% 29% Less than $1bn
56%
50%
50%
22% 59%
72%
7% 44%
50%
43%
$1bn to $2bn $2bn to $5bn
More Than $5bn
40%
67%
9% 28%
32%
8% 25%
Buyout
Growth equity
Debt
10%
78%
Real Asset
50% Other
Strategy
AUM
If the deal does not close: Fund 2% 8% 22%
2% 12% 22%
68%
65%
Total
Less than $1bn
Management firm 11% 6% 83%
Reimbursed by the portfolio company 43% 100% 57%
$1bn to $2bn $2bn to $5bn
AUM
More Than $5bn
20
Split between both fund and firm
11% 14%
5% 14%
75%
82%
Buyout
Growth equity
25% 17%
44%
10% 40%
58%
56%
50%
Debt
Real Asset
Other
Strategy
Question 17 After a definitive agreement is signed, the firms financing team and the portfolio company CFO negotiate financing for the deal. Who pays legal fees incurred by the lender? If the deal closes: Fund
Management firm
Reimbursed by the prospective portfolio company
Split between both fund and firm
1% 70%
76%
2% 27%
2% 22%
Total
61%
77%
81%
83%
67%
76%
8%
39%
Less than $1bn $1bn to $2bn
23%
17%
19%
24%
25%
$2bn to $5bn
More Than $5bn
Buyout
Growth equity
Debt
AUM
57%
57%
43%
43%
Real Asset
Other
Strategy
If the deal does not close: Fund
1% 18%
16%
16%
16%
65%
Total
69%
28% 6%
67%
Management firm 15% 23%
62%
Reimbursed by the prospective portfolio company 14%
33%
14%
67%
Less than $1bn $1bn to $2bn $2bn to $5bn More Than $5bn
15% 10%
25% 17%
71%
75%
Buyout
Growth equity
21
38% 13%
29% 14%
58%
50%
57%
Debt
Real Asset
Other
Strategy
AUM
Split between both fund and firm
Question 18 If you answered yes to the previous question, if the firm ceases to pay them the retainer would you offset the operating partners cash directors fee against the funds management fee?
Assume an operating partner on retainer with your firm joins a portfolio company as an independent director. Would you offset the operating partners cash director fee against the funds management fee?
No
Yes
No
Yes
33% 49%
51% 67%
22
Question 19 If you answered yes to the previous question, what is the amount of the offset?
Would you offset any equity options that the portfolio company grants to this operating partner (for services as an independent portfolio company director) against the fund management fee?
No
Net cash received from the option shares at exit from the investment Value at time of exercise
Yes
Value at time of grant
37%
32%
48%
68%
15%
23
Question 20 If the portfolio company pays consulting fees to the operating partners company and the operating partner owns 25 percent of the consulting firm, would you offset the consulting fees paid to the consulting business against the management fee? Not at all 24% 19%
7% 33%
Yes, in the amount of 25% of the fees 8%
36%
15% 15%
60%
20%
Total
48%
Less than $1bn
57%
AUM
55%
18%
70% 44%
40%
$1bn to $2bn $2bn to $5bn
11% 33%
33%
22%
22%
92% 57%
Yes, in total
More Than $5bn
Buyout
67%
67%
Real Asset
Other
27%
Growth equity
Debt
Strategy
Would knowing what the consulting firm actually pays the operating partner make any difference to you? No 28%
72%
Total
39%
61%
Less than $1bn
14%
86%
8%
92%
$1bn to $2bn $2bn to $5bn
AUM
Yes 11%
25%
89%
75%
More Than $5bn
24
Buyout
28%
50%
72%
50%
Growth equity
Debt
Strategy
33% 67% 67% 33% Real Asset
Other
Moderator: Gregory J. Nowak • Partner in the Philadelphia and New York offices of Pepper Hamilton LLP • Practice leader for hedge funds of the firm’s Funds Services Practice Group
212.808.2723 [email protected]
• Concentrates his practice in securities law, particularly in representing investment management companies and other clients on matters arising under the Investment Company Act of 1940 and the related Investment Advisers Act of 1940 • Represents many hedge funds and other alternative investment funds in fund formation, investment and compliance matters, including compliance audits and preparation work. 25
Speaker: Julia D. Corelli
215.981.4325 [email protected]
• Partner in the Philadelphia office of Pepper Hamilton LLP • Co-chairs Pepper’s Funds Services Group and also serves the firm as vice chair of its Executive Committee and co-chair of its Commercial Department • Concentrates in private investment fund formation, operations and compliance, private equity investment transactions, venture capital investments, acquisitions, dispositions and financings of business enterprises, joint ventures, and intra-partner dealings. • Also is experienced in matters of investment fund principal compensation and succession planning and serves as general outside counsel to family offices. 26
Speaker: Mark Heil • Executive Vice President of Business Development of PEF Services • Has worked with private equity firms since 1994 • Prior to joining PEF Services, he founded CereNova Fund Marketing LLC, a boutique thirdparty marketing firm that provided capital raising and marketing services primarily to early stage venture, growth capital, mezzanine, venture debt and buyout funds. 212-203-4679 [email protected]
27
For more information visit www.pepperlaw.com and www.pefundservices.com
28
