In the traditional two-and-20 fee structure that private equity firms employ for each of their funds, it goes without saying that investors in those funds accept this arrangement with open eyes. It also stands to reason that these investors, many of whom are institutional in nature, and fully capable of understanding the ancillary fees that might flow to private equity firms in the course of their 5-7 year commitment.
Harder to understand is how private equity firms are allowed to play fast and loose with management fees against the acquired company. In the case of Quintiles, TPG has probably generated $225 million in carried interest (realized and unrealized gains of $1.6 billion less $514 million equity times 20% performance fee) plus $10 million annually from the 2% management fee.
The total take for the two-and-20 fee structure comes to approximately $300 million, most of which was earned over the last six years since it acquired control from One Equity. Yet despite this largesse, private equity firms seek to extract even more for themselves by also charging management fees to the companies they’ve acquired plus hefty one-time termination fees. In the case of TPG it comes to $12 million, which in the scheme of things is peanuts, but it’s money just the same that pension funds could use.
Private equity is bullying its way to big profits. It’s time the SEC brought that to a close.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.