Portfolio Company Fees - Some Empirical Evidence and Recommendations

Abstract

Many private equity (buyout) managers generate three streams of management revenue. Management fees and carried interest are agreed with investors in advance and are fully visible. The generic term “2 and 20” refers to these. The third stream consists of portfolio company fees. These are not agreed in advance; nor are they easy to see, even after they have been paid. Little public information is available about these fees. Previous academic research into private equity manager revenues has used simulations to estimate how big they are. These suggest that portfolio company fees may add between 21 and 39 percent, net, to management fees. This paper draws on accounting data from Securities and Exchange Commission filings by three major private equity managers: Apollo, Blackstone and KKR. It suggests that reality lies at the higher end of the previous estimates. This is an important stream of revenues (for managers) and costs (for investors). Private equity managers should provide more disclosure about it; and both their public shareholders and their fund investors should demand the same. Regulators and accounting standards bodies should also take up the issue.

Keywords: Private equity, fees