Speaking on the sidelines at the SuperInvestor conference in Amsterdam, Georges Sudarskis, formerly chief of the private investment programme at the Abu Dhabi Investment Authority, said that the current private equity fund model is a “rigged arrangement”.
Sudarskis, who led Adia’s private investment programme between 1998 and 2009, said that fund managers’ and investors’ interests are no longer aligned. Speaking on a panel earlier, he said: “We need to make private markets great again by changing the governance structure.”
Private equity firms used to invest substantial amounts alongside their funds, Sudarskis told FN. “It was not uncommon to have a $ 500 million fund where the manager committed 5%. Then you can argue that every investment they [did] would be in their interest [as well]. The problem is that fund sizes have grown. You now have $ 10 billion funds where the commitments of the manager are small. They collect far more in fees.”
A private equity firm typically charges between 1.5% and 2% in annual management fees, and once it hits the 8% annualised return known as a hurdle rate, it takes 20% of the overall deal profits.
Sudarskis’s comments come after Rob Lucas, one of the managing partners at CVC Capital Partners, said during a separate panel session on November 16 that the relationship between fund managers and investors is “actually in very rude health”.
Lucas added that the relationship “has held strong through some real shocks to the system – through all the shocks of 2009 through to the recent shocks – and I think that’s because there is very good alignment.”
While he acknowledged that there “are always challenges” he said that “fundamentally I think the relationship between GPs [general partners, or private equity firms] and LPs [limited partners, or investors] is in a very good place at the moment.”
In a response to those comments, Sudarskis said he knew and liked Lucas and that CVC was “one of those rare firms that still tries to be straightforward”. But he added: “He’s dreaming.”
A spokesman for CVC was not immediately available for additional comment.
Sudarskis, who since leaving Adia has set up a business advising sovereign wealth funds on private equity, added that firms should follow the example of Kolhberg & Co, a US mid-market private equity firm established by the founder of KKR, which is always the lead investor in its deals.
“When you invest in Kohlberg, you know that [it] will invest 30% of its money in the fund. When [the firm] invests it, [it] will treat investment decisions as if it is its own money. That is a very important dimension.”
Marc Roijakkers, senior fund manager at Blue Sky Group, the Dutch pension fund for airline business KLM which started its private equity investment programme in 2012, added during the panel discussion that private equity has a “complex fee structure”.
While not criticising the price of the asset class, he said that selling private equity to the pension fund board is very challenging: “Should we be paying 2% [management fees] and 20% [carried interest]?. It’s tough. We need to explain that over and over again.”