Callan study finds private equity fee uniformity

Callan evaluated partnership terms for 90 private equity partnerships and found that the median management fee was 1.75%. “We created this study to help investors evaluate a partnership’s terms compared to those of its peers, which is an especially useful tool when conducting due diligence,” said Pete Keliuotis, head of alternatives consulting at Callan. “We also envision that general partners may find the study useful as a way to benchmark their partnership terms.” Callan’s Alternatives Consulting group includes the private equity, private credit, and hedge fund consulting teams. In addition to leading these teams, he performs research and advises clients’ alternative investment portfolios. Typically, the management fee steps down over time, according to Callan. So while initially when capital is committed it totals 1.75% annually, it almost always drops to 1.5% on invested capital. Only 17% of the GPs surveyed do not have a drop in management fees. According to the consulting firm, the fees may be higher or lower than the findings suggest and can signal to investors whether they are overpaying or benefiting from fee savings. The survey mostly reflects buyout funds in North America and are offerings that were in the market and reviewed by Callan in 2018 and 2019. Callan found a high level of uniformity for fees and terms among the partnerships, which officials say indicates that GPs have significant bargaining power. They said this could change as the impact of the pandemic resets private equity market dynamics. Looking at the variety of fee structures, Callan considered minimum limited partner commitments, general partner commitments, management fees, type of waterfall used, carried interest percentage and hurdle rate in assessing manager and investor alignment. For instance, waterfall arrangements or cases when carried interest is either paid to the GP on a per investment basis (American) or on a cumulative basis across all investments (European), are fairly common. The majority of funds in the survey have an American waterfall, but one-third relied on a European waterfall. While relying on the survey results as a benchmark for use with clients, Callan announced that it expects to publish the study annually going forward.

Callan study finds private equity fee uniformity

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