Blackstone teases a major change to controversial fees

For the uninitiated,monitoring fees are charged to portfolio companies on an annual basis, ostensibly for ongoing services. Transaction fees are pre-determined amounts that portfolio companies will pay the private equity firm upon the realization of a liquidity event, as a sort of one-time bonus for a job well done. The trouble with both of these set-ups, however, is that the private equity firm itself is majority owner of the portfolio companies, meaning that such agreements amount to little more than self-dealing. Even worse, many private equity firms have historically taken a larger cut of such fees than they have of investment profits, meaning they had a perverse incentive to take fees that could lower the portfolio company’s overall value (and, thus, LP returns).

Blackstone had moved up to an 80% share for its most recently private equity fund, and recently told investors that it would share 100% of all “accelerated” monitoring fees, which are payments-in-full when Blackstone signs a 10-year monitoring agreement but sells the company much earlier.

During a media call earlier this week, I asked Blackstone president Tony James if the firm had determined what percentage of monitoring and transaction fees it would charge investors on the upcoming fund. He said no final determination had been made, but did note how Blackstone’s most recent energy fund had a 100% share on such fees. “I think you can extrapolate from that,” he added.

Or, put another way, Blackstone is on the precipice of sharing all of these fees with its limited partners. And, if history is any guide, that likely means we’ll see far fewer of such fees charged to portfolio companies going forward. It’s a very welcome change.

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