Private equity data firm Pitchbook is out with their third quarter of 2017 report on trends in global private equity (PE) deal multiples and other interesting data points. Among the many interesting findings in the report is a section on the trend in PE fees. Without looking, what would you guess the trend in PE fees looks like? Here’s the look.
The Transaction Fee
Of the two most common fees the private equity industry collects, the most common is the transaction fee. Would you guess the transaction fee is trending higher or lower? Take your guess now, because the answer follows.
Interestingly, the median transaction fee as a percentage of deal value is trending downward, at least for 2017. According to Pitchbook figures as of September 18, 2017, the median transaction fee as a percentage of deal value declined to 2.0 percent in 2017, a 1 percent decline from the estimated 3.0 percent in 2016. The current 2.0 percent is the lowest it’s been since at least 2013 and 2014, when the median fee also bottomed at 2 percent. The year with the highest median fee was in 2016, at 3.0 percent. Interesting.
Source: Pitchbook
The Monitoring Fee
By far the less common fee imposed by private equity managers, monitoring fees are fees charged by the general partner to the portfolio company for its advisory and management services. These are much rarer since the Security and Exchange Commission began issuing fines in 2015 to managers attempting to accelerate the monitoring fee. Perhaps unsurprisingly, limited partners often demand fee offsets, which often allows limited partners to use the monitoring fee to offset the fund management fee.
In any event, would you guess the median monitoring fee is trending up or down?
Interestingly, the fee is generally trending up, and has been trending upwards for two years after bottoming out at about 2.3 percent in 2015. The current estimated median monitoring fee as a percentage of earnings before income taxes, depreciation, and amoritization (EBITDA in the figure below) is about 4.0 percent. Interestingly, the fee peaked recently at about 5.0 percent in 2013, and declined in 2014 and 2015 to 4.1 percent and 2.3 percent.
Source: Pitchbook
The Transaction and Monitoring Fees Together
With a picture of the two fees now established, here’s a look at the percentage of transactions with each type of fee. Before looking, which fee – transaction or monitoring fee – would you guess dominates the other?
Completely unsurprisingly, the percentage of transactions with transaction fees is trending up, currently estimated at 78 percent. On the other end, the proportion of transactions with monitoring fees is trending downward, currently estimated at 19 percent.
Source: Pitchbook
Conclusion
In an interesting look at the picture of private equity fees, one picture emerges. Private equity managers are relying more heavily on transaction fees and much less on monitoring fees. If the recent trend is any indication, it will be that way for a long time more.
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