Private equity firms have other fees such as transaction fees and monitoring fees in addition to the commonly known “2 and 20″ fees for the fund which is a management fee (typically 2% of committed capital of the fund) and carried interest (typically 20% share of capital gain profits of the fund net of fees and expenses). Global law firm Dechert LLP recently conducted a survey of private equity transaction fees and monitoring fees that covered 60 leveraged buyout acquisitions by 40 different lead investors, all of which were prominent private equity firms. Below is an overview of transaction and monitoring fees (including a sample of The Blackstone Group’s legal agreement-see below) and a summary of Dechert LLP’s findings:
Transaction Fees. Transaction fees, also known as deal or success fees, are the fees charged by the private equity firm in connection with the completion of the acquisition for typically unspecified advisory services. The private equity firms usually collect such one-time fees in cash typically at closing. Out-of-pocket expenses are usually reimbursed separately. Given the assessment and execution of transactions are expensive, the transaction fees usually help cover the cost of broken deals or abort costs from other deals. A majority of private equity firms offset 50% or more of the transaction fees against the management fee (i.e., typically 2% of committed funds) charged to limited partners. Additionally, the private equity firms generally disclose its transaction fee as apart of its sources and uses of funds for the transaction as it works with lenders, management and co-investors in terms of structuring the transaction, so there is some outside market pressure on this fee.
- Average transaction fee is 1% to 1.25% of deal size. According to the survey, the average transaction fees tends to converge around 1.25% of deal size for deals under $1 billion, and 1% for deals over $1 billion. In other words, for a $300 million deal the transaction fee would be $3.75 million and for a $1 billion deal the transaction fee would be $20 million.
