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Operating Under the Microscope: Private Equity Fees and Expenses August 27, 2014

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Page 1: Private Equity Fees and Expenses - PEF Services · 8/27/2014  · What is the Private Funds Management Survey? • A definitive study in fees and expenses for private equity funds

Operating Under the Microscope: Private Equity Fees and Expenses

August 27, 2014

Page 2: Private Equity Fees and Expenses - PEF Services · 8/27/2014  · What is the Private Funds Management Survey? • A definitive study in fees and expenses for private equity funds

Panelists:

Anne Anquillare, President, PEF Services LLC Blinn Cirella, CFO, Saw Mill Capital LLC

Julie Corelli, Partner, Pepper Hamilton LLP Nicholas Donato, Editor, Private Funds Management

Moderator:

Mark Heil, EVP, Business Development, PEF Services LLC

Page 3: Private Equity Fees and Expenses - PEF Services · 8/27/2014  · What is the Private Funds Management Survey? • A definitive study in fees and expenses for private equity funds

What is the Private Funds Management Survey?

• A definitive study in fees and expenses for private

equity funds.

• Need a Survey? Send an e-mail to Janice Schopper

at [email protected] for the link.

mailto:[email protected]
Page 4: Private Equity Fees and Expenses - PEF Services · 8/27/2014  · What is the Private Funds Management Survey? • A definitive study in fees and expenses for private equity funds

Why all the scrutiny around fees now?

• Presence exam initiative

• Increasing institutionalization of the asset class

• Recent media reports

Page 5: Private Equity Fees and Expenses - PEF Services · 8/27/2014  · What is the Private Funds Management Survey? • A definitive study in fees and expenses for private equity funds

How are fund advisers responding?

• Review of marketing documents and regulatory filings

• More conversations with investors

• Industry working groups are discussing the matter with

SEC officials

Page 6: Private Equity Fees and Expenses - PEF Services · 8/27/2014  · What is the Private Funds Management Survey? • A definitive study in fees and expenses for private equity funds

So what happens next?

• Still anyone’s guess…

• Possibility of enforcement action

• Best practices continue to evolve

Page 7: Private Equity Fees and Expenses - PEF Services · 8/27/2014  · What is the Private Funds Management Survey? • A definitive study in fees and expenses for private equity funds

Andrew Bowden Director of the SEC’s Office of Compliance and Inspections “In some instances, investors’ pockets are being picked. These investors may be sophisticated and they may be capable of protecting themselves, but much of what we are uncovering is undetectable by even the most sophisticated investor.”(Source: NYT, May 25, 2014)

Page 8: Private Equity Fees and Expenses - PEF Services · 8/27/2014  · What is the Private Funds Management Survey? • A definitive study in fees and expenses for private equity funds

“Greed is good.” Gordon Gekko

Fagin from Oliver Twist “You have to pick a pocket or two”

Page 9: Private Equity Fees and Expenses - PEF Services · 8/27/2014  · What is the Private Funds Management Survey? • A definitive study in fees and expenses for private equity funds

Blackstone Capital and Biomet

• Source :New York Times article

• Sold for $2 million profit

• Earned $30million in monitoring fees

Page 10: Private Equity Fees and Expenses - PEF Services · 8/27/2014  · What is the Private Funds Management Survey? • A definitive study in fees and expenses for private equity funds

Other SEC Concerns

• Disclosures

• Cost Shifting

Page 11: Private Equity Fees and Expenses - PEF Services · 8/27/2014  · What is the Private Funds Management Survey? • A definitive study in fees and expenses for private equity funds

Dammed Creek Case Scenario (hypothetical)

Cast of Characters

• Nick Donato- small endowment investor

• Blinn Cirella-large institutional investor

• Julie Corelli-Managing Director of Dammed Creek

• Anne Anquillare-CFO of Dammed Creek

Page 12: Private Equity Fees and Expenses - PEF Services · 8/27/2014  · What is the Private Funds Management Survey? • A definitive study in fees and expenses for private equity funds

Dammed Creek Case Scenario (hypothetical)

Dammed Creek’s LPA

• Annual meeting

• Waived management fees

• 100% offset

• Organizational expenses up to $500,000

• Operating costs and expenses of the fund

Page 13: Private Equity Fees and Expenses - PEF Services · 8/27/2014  · What is the Private Funds Management Survey? • A definitive study in fees and expenses for private equity funds

Dammed Creek Case Scenario (hypothetical)

Initial Investigation • Attend an industry association meeting in Dallas

to get to know CEO of BizWiz, LLC • Take CEO out to dinner • Fly back to NY to begin auction process

Fund Management Company Other Conference $1,000 Airfare $1,600 Taxi $60 CEO Dinner $350 Change Fee/Airfare $700

Page 14: Private Equity Fees and Expenses - PEF Services · 8/27/2014  · What is the Private Funds Management Survey? • A definitive study in fees and expenses for private equity funds

Dammed Creek Case Scenario (hypothetical)

Initial Bid • Received CIM • 5 days to submit preliminary indication of

interest • Dammed Creek submits bid

Expense Fund Management Company Other Airfare $1,400 Legal $13,000 Hotel $4,800

Conference Room Meals

$2,000 (separate expense on law

firm bill)

Page 15: Private Equity Fees and Expenses - PEF Services · 8/27/2014  · What is the Private Funds Management Survey? • A definitive study in fees and expenses for private equity funds

Dammed Creek Case Scenario (hypothetical)

The Bidding Process • Dammed Creek makes it to the next round in the

auction process

• Deal team engages service providers for background

checks, due diligence, IP analysis, sales and regulatory

risk analysis, and 100 day plan

• Bid is rejected by the selling transaction team

• Dammed Creek resubmits bid – 20% higher

Page 16: Private Equity Fees and Expenses - PEF Services · 8/27/2014  · What is the Private Funds Management Survey? • A definitive study in fees and expenses for private equity funds

Dammed Creek Case Scenario (hypothetical)

The Bidding Process Expense Allocation

Expense Fund Management Co. Other Legal $22,000

Accounting $14,000 Background Checks $14,000 Legal Due Diligence $15,000 IP Litigation Review $5,000 Market Consultant $16,000

100 Day Plan $10,000 IP Strategy Consultant $3,000 Sales/Regulatory Risk $2,500

Page 17: Private Equity Fees and Expenses - PEF Services · 8/27/2014  · What is the Private Funds Management Survey? • A definitive study in fees and expenses for private equity funds

Dammed Creek Case Scenario (hypothetical)

Staying in the Game

• Principal takes the CEO, COO, and CFO to Brazil to attend a World Cup Soccer game in the target company’s private jet

Expense Fund Management Co. Other World Cup Trip $10,000

Private Jet $25,000

Page 18: Private Equity Fees and Expenses - PEF Services · 8/27/2014  · What is the Private Funds Management Survey? • A definitive study in fees and expenses for private equity funds

Dammed Creek Case Scenario (hypothetical)

LOI to Close • Dammed Creek makes it to third round of the auction

process and submits a formal LOI • Exclusive for 20 days • Definitive agreement signed 18 days later

• Dammed Creek is negotiatating financing for the transaction

• Dammed Creek Fund is owner of 85% of BizWiz • Investment banker takes everyone to New Orleans for

the weekend

Page 19: Private Equity Fees and Expenses - PEF Services · 8/27/2014  · What is the Private Funds Management Survey? • A definitive study in fees and expenses for private equity funds

Dammed Creek Case Scenario (hypothetical)

LOI to Close

Expense Fund Management Company Other IP Consultant $19,500

Sales/Regulatory Risk $14,000 Market Consultant $8,000

Accounting $30,000 Offsite meetings $22,000

Finance Team Legal $75,000 Deal Team Legal $150,000

Accounting $33,000 Investment Banking

Fee $3,000,000

New Orleans Weekend $50,000

Page 20: Private Equity Fees and Expenses - PEF Services · 8/27/2014  · What is the Private Funds Management Survey? • A definitive study in fees and expenses for private equity funds

Thank You

PEF Services LLC Anne Anquillare

212-203-4681 [email protected] www.pefundservices.com

PEF Services LLC

Mark Heil 212-203-4679

[email protected] www.pefundservices.com

Pepper Hamilton LLP Julie Corelli

215-981-4325 [email protected]

www.pepperlaw.com

Private Funds Management Nicholas Donato

212-937-0385 [email protected]

www.privatefundsmanagement.net

Saw Mill Capital LLC Blinn Cirella

914-741-9089 [email protected]

www.sawmillcapital.com

mailto:[email protected]
http://www.pefundservices.com/
mailto:[email protected]
http://www.pefundservices.com/
mailto:[email protected]
mailto:[email protected]
mailto:[email protected]

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