Young people: Read “Private Equity’s ‘Hidden’ Fees Totaled $20 Billion” (WSJ, December 13, 2015)
Boring but important if you’re planning a career. Here are some excerpts:
The “monitoring fees” and “transaction fees” are typically agreed between private equity firms and the managers of the companies they own. Investors in the private equity funds know these types of fees are charged but don’t negotiate the details.
“These fees are effectively hidden from investors,” Ludovic Phalippou, an associate professor at Oxford University’s Saïd Business School, who co-authored the report, said in an interview. “Investors usually don’t see these fees and don’t know how much they are paying.”
Fees were earned even when deals failed. The $32 billion takeover of Texas-based utility Energy Future Holdings Corp. entered bankruptcy protection in 2014. Even so, the deal earned $666 million of portfolio company fees for KKR & Co., TPG and Goldman Sachs Group Inc., the report said.
A disaster for investors? Perhaps. The source of your year-end bonus? For sure!
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