Everyone is offering incentives — Raymond James

Everyone is offering incentives — Raymond James
Fee discounting has started. Is this the end of a 'golden era'?
AUG 14, 2023

Once upon a time there was a golden age. Porridge was neither too hot, nor too cold. Interest rates were low, valuations were high and there was leverage for all. Banks wined and dined private equity funds so that they might be considered as lenders, while investors queued up to shower funds with cash. Everything was awesome, as the Lego movie told us.

And then, as they do, times changed.

The winds of inflation huffed and puffed, and suddenly everything got, well, much more like the infamous "old day"’ when you actually had to try hard.

Private equity firms are now heating up the competition to get investors by starting to discount fees or offer other incentives. As dealmaking and listings have withered away, so big investors have been unable to sell out their existing investments to take part in any new opportunity.

“Almost every firm in our suite of clients is contemplating or has employed some form of incentive for investors to put capital in as quickly as possible and in as large a size as possible,” Sunaina Sinha, head of private capital at Raymond James, told the  Financial Times. 

“In the [private] equity business, this year has really marked the end of an era,” Apollo Global Management Chief Executive Marc Rowan said last week, adding that firms like his will "be forced to go back to investing in the old-fashioned way" and be "very good investors”.

There are other big hitters who agree, including the $700 billion Singapore Sovereign Wealth Fund’s chief investment officer Jeffrey Jaensubhakij. “Many of the things that were tailwinds for the private equity industry have come to an end,” he said, “And I don’t think they are coming back any time soon.”

According to a report released last month by Bain & Co, fundraising across private markets is expected to fall by 30% this year. “Stalled dealmaking and exits have jammed the capital flywheel, putting a premium on liquidity,” it said.

And as big players battle to get the momentum back into the capital flywheel, they’re trying to tempt investors with discounts or other sweeteners. According to Financial Times sources, Ardian, Cinven, CVC Capital Partners and TPG have all offered fee discounts or other sweeteners recently.

Typically, PE firms follow the 2 and 20 rule — charging a 2% management fee, and then a 20% charge after a certain performance metric has been exceeded. Some CVC investors have managed to achieve discounts to get their fees down as low as 1.35%.

Funds, however, are keen to keep these sweetheart deals as secret as possible, and maintain their headline rates by offering side letters that offer the incentives.

Any special ‘side deals’ that are being offered, however, will be subject to SEC scrutiny. "Private fund advisers, through the funds they manage, touch so much of our economy. Thus, it’s worth asking whether we can promote more efficiency, competition, and transparency in this field," SEC Chair Gary Gensler said in a release announcing more oversight.

Latest News

Advisor moves: Atlas tops $1B as Wells Fargo, UBS add bank veterans
Advisor moves: Atlas tops $1B as Wells Fargo, UBS add bank veterans

Wells Fargo adds two bank-channel recruits, UBS lands a JPMorgan Chase veteran, and a multi-family office lifts Atlas past $1B

Advisor mom’s son used her password to log into clients’ accounts, sell deal with conflicts, according to Washington state
Advisor mom’s son used her password to log into clients’ accounts, sell deal with conflicts, according to Washington state

“The state comes down on you in years when you make 40% returns for clients,” said Bill Swayne, the advisor and son of Candace Swayne.

Osaic in talks with Anthropic as AI reshapes advisor workforce
Osaic in talks with Anthropic as AI reshapes advisor workforce

The Independent broker-dealer giant has had “active conversations” with the Claude maker, which is days away from its expected IPO

The retirement milestone advisors aren't tracking
The retirement milestone advisors aren't tracking

For Gen X clients entering life after work, answering the financial question isn't enough to solve the entire retirement equation.

Wealthtech firms target stock pay, pensions and heirs for advisors
Wealthtech firms target stock pay, pensions and heirs for advisors

Tools from Grantd, Income Lab and Healthspan Wealth aim to keep RIAs involved in clients’ biggest money decisions

SPONSORED Best Practices for Engaging Women Around Alternatives

Growing wealth, evolving priorities, and untapped opportunities are reshaping how women approach long-term investing.

SPONSORED Built on insurance experience to deliver on long-term promises

Knighthead Life entered the market with a competitive MYGA. A strong launch earned advisor confidence and paved the way for FIAs.