(Bloomberg) David Rubenstein, co-founder of the Carlyle Group, said that private equity firms are lowering their fees in the wake of the 2008 market crash.
Buyout firms such as Carlyle have traditionally charged clients a 2% fee on committed capital and an incentive fee that equals 20% of investment profits. As fundraising becomes more difficult, buyout firms are cutting management fees, Rubenstein said today at the Bloomberg Dealmaker Summit in New York.
"I'm not sure anybody really gets 2 and 20 anymore," said Rubenstein. Large buyout funds now probably charge management fees of 1% to 1.25%, he said. Deal and transaction monitoring fees that buyout firms had charged to the companies they acquired are "largely" going away.
"Investors have recognized and general partners have recognized that there can be a change or improvement in the way the construct has come together in private equity," Rubenstein said.
Private-equity funds raised $57 billion in the third quarter, 16% more than in the previous quarter, when commitments fell to a seven-year low, according to researcher Preqin. Funds focused on the U.S. raised the most in the third quarter, with 37 firms gathering $41.1 billion, London-based Preqin said today in a statement. Leveraged-buyout firms, including New York-based Blackstone Group LP, raised the most capital.Returns Count Most
Another potential change is whether private-equity firms charge their management fees on committed capital or money that has actually been invested, Rubenstein said. Most private-equity clients support the payment of a 20% profit participation, also known as the carry, because they want to encourage managers to make money.
"The most important thing is the net rate of return, after the fees are done with, the carry is done with, what are you left with," Rubenstein said. "If you go back over 5 years, 10 years, 15 years, 20 years, and look at top performances, you will find that you do better in private equity than any other thing else you can legally do with your money."
Carlyle has invested about $65 billion of equity since its founding in 1987, Rubinstein said, adding that the firm's internal rate of return has averaged 30% annually since then. After fees are deducted, Carlyle's annual returns have averaged 25%.66 Funds
The Washington-based firm now has more than $90 billion in assets under management. Carlyle runs 66 funds that specialize in four areas, including buyouts, credit, growth capital and real estate, according to its Web site.
In July, Carlyle agreed to acquire NBTY Inc., a manufacturer of nutritional supplements, in a transaction valued at $3.8 billion.
Rubenstein, a native of Baltimore, practiced law in New York with the firm Paul, Weiss, Rifkind, Wharton & Garrison before cofounding Carlyle. He also was Deputy Assistant to the President for Domestic Policy from 1977 through 1981 during the Carter Administration.