Hot growth in Asian markets has allowed Asian private equity funds to escape the downward pressure on management fees and private equity compensation felt by their U.S. and European peers, reports Reuters.
A new survey by Hong Kong-based Squadron Capitals reveals that a rising demand to invest in Asia, coupled with a limited supply of funds, has kept management fees over 2 percent on average. And this is particularly true among funds with $1 billion or more in assets, which tend to attract the larger institutional investors.
Reuters quotes data from Preqin showing that over 40 percent of private equity funds globally now charge less than 2 percent a year. But in Asia, over 80 percent of funds charge that much or more. In larger funds, these fees can generate profits above the actual costs of management.
“It’s not the percentage that’s the issue from an investor’s point of view. If it’s a $2 billion fund, then 2 percent of that in itself is already $40 million of fees a year, and it is pretty unlikely that they have a cost base that is $40 million,” according to Wen Tan, managing director at Squadron.
However, some Asian funds offer big investors something referred to as “sweetheart deals” where the firm takes into account both the management fee and the carry (profit on performance) to reach an acceptable compromise. Squadron’s Tan says he expects such sweetheart deals to grow beyond the current 10 percent of the market as Asian funds find it increasingly difficult to raise funds.
Some other regional differences: roughly 90 percent of Asian funds offset the fees they earn from being board members on portfolio companies against their management fees. While the global average is only 43 percent. And most Asian PE funds return all of an investor’s money in a fund and a minimal profit before the PE firm becomes eligible for incentive payouts.
What’s your take? Are you contemplating greater activity or expanding your private equity job considerations to Asia? Add your comments below.
Comments on this entry are closed.