TPG Joins Apollo, Blackstone in Raising Fees as Money Flows

(Bloomberg) -- Some of the largest private equity firms are charging customers more even as price cuts hit almost every other corner of the asset-management industry.

TPG and Hellman & Friedman are increasing management fees on new -- and bigger -- funds they’re seeking to raise, according to investor documents viewed by Bloomberg News. The moves follow similar ones made by rivals Apollo Global Management LLC and Blackstone Group LP in recent years, when they started gathering money for their flagship buyout pools.

The $3 trillion private equity industry is prospering as investors crave higher yields than they see in public markets. The demand helped firms attract a record $453 billion last year, giving them the upper hand, even as returns broadly across the asset class have declined.

“A lot of investors are more worried about access than fees,” said Kelly DePonte, a managing director at Probitas Partners in San Francisco, which helps raise money for private equity firms.

Representatives for the four investment firms declined to comment.

Latter Phase

Hellman & Friedman, the San Francisco-based firm founded in 1984, will charge a higher management fee of as much as 1.25 percent compared with 0.75 percent on its previous pool once the investment phase is completed, according to a marketing document seen by Bloomberg. The firm will also be applying fees on a potentially much larger pool. It is seeking at least $16 billion, including the company’s commitment, which would make the fund more than 40 percent larger than the last one.

Even TPG, which faced a rough patch because of highly leveraged deals made before the financial crisis, is charging customers more than its prior fund during the post-investment period.

The firm is amassing at least $14 billion for its eighth buyout fund and a supplementary health-care “sidecar” pool that invests alongside it on deals in that sector, after raising $10.5 billion for its 2015 flagship. In another change, TPG is offering less-generous breaks to clients who decide to commit early and write big checks, according to documents seen by Bloomberg. For example, an investor committing $400 million to the new fund early will get a 10 percent management fee discount, compared with a 25 percent reduction offered to initial backers of the 2015 pool.

Performance Power

By comparison, money managers elsewhere in finance are facing pressure on revenues as investors flock to low-cost exchange-traded and index funds tracking markets. Many hedge funds, which have generally struggled to outperform in recent years, have resorted to cutting fees to keep clients.

Firms like Hellman and TPG are setting steeper terms after watching competitors ratchet up fees without deterring interest. Last year Apollo, led by Leon Black, raised $24.7 billion, or 34 percent more than it did in 2013, despite telling investors they would generally be charged more.

The New York-based firm had more clout in part because of strong performance. Its 2008 and 2013 flagships were producing net multiples of 2.05 and 1.35 times capital, respectively, as of March 31, according to an Oregon Public Employees Retirement Fund document.

“For those managers that have the returns to back it up, we are seeing more of a stretch toward GP-friendly fees,” said Andrea Auerbach, global head of private investments for Boston-based investment-advisory firm Cambridge Associates.

Following the financial crisis, cash-constrained investors had pulled back from private equity, which gave those willing to commit to funds more negotiating power. But in recent years, a robust fundraising market has made it easier for firms to command better terms.

When Blackstone set out to raise its current $18 billion flagship fund in 2014, it indicated it would charge higher management fees than the prior pool, which took four years to gather $16 billion. The current fund charges a 1.5 percent management fee during the investment period, after which the cost falls to 1.25 percent and eventually scales down to 0.75 percent, according to an investor document.

FirmPrior Fund SizeSuccessor Fund Size Prior Fund Fee (invest period)New Fund Fee (invest period)Prior Fund Fee (post-invest)New Fund Fee (post-invest)
Blackstone Group $16 billion$18 billion1.5% on first $7.5 billion; 1% on excess1.5% on all money raised0.75%Scales down from 1.25% to 0.75%
Apollo Global Management $18.4 billion$24.7 billion1.5% on first $7 billion raised; 1% on excess 1.5% on all money raised0.75%Scales down from 1.25% to 0.75%
TPG $10.5 billionAt least $14 billion1.5%1.5%0.75%Scales down from 1.25% to 0.75%
Hellman & Friedman About $11 billionAt least $16 billion1.5%1.5%0.75%Scales down from 1.25% to 0.75%

Note: Firms sometimes adjust fees for large commitments.

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