Spotlight may turn from bankers’ bonuses to fund managers’ fees

Luckily for fund managers, unlike their banking cousins, their bonuses are not in the public spotlight. But that could change, if the EU’s Alternative Investment Fund Managers directive – so loathed by hedge funds and private equity GPs – survives in its current, second-draft form.

The draft proposes that high-earning fund management staff must defer at least 40% of their bonuses for three years and their pay be disclosed. Managers of closed-ended funds may not receive carried interest until funds run their full lifespan.

Will they get more sympathy from their investors than bankers have from the public? Not likely, judging by INREV’s latest report on property fund manager fees, which contains some interesting nuggets.

It reveals clear conflicts of interest, such as the 10 funds whose managers earned performance fees based on in-house valuations. Ten is a small number, but is 20% of the funds that charge fees based on valuation, ie unrealised returns – a practice investors are unhappy with. There are sure to be more examples among managers outside INREV’s survey.

Investors are also hacked off about the common practice of charging acquisition fees on top of annual management and performance fees. Perhaps they feel they have been gullible. Managers say such fees are a reward for finding ‘off market’ deals, but few deals are really off market. If buying and selling assets isn’t part of a fund manager’s regular job, what is?

Investors aren’t above acquiescing to a bit of skullduggery too, INREV discovered. They often make fee structures even more opaque by demanding fee discounts in side letters to final fund documentation; apparently, “even smaller-sized, first-closing investors” are at it. The cheek!

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