Blackstone, TPG Capital disclose fees under pressure from US SEC

Two of the biggest private equity firms are disclosing fees that had largely been hidden as US regulators demand increased transparency from the industry.

Blackstone Group said it could collect as much as US$20 million annually from investors and companies in its next buyout fund, for services such as health care consulting and bulk purchasing. TPG Capital put the potential charge for similar services at as much as US$10 million a year for its new fund.

The fees, detailed in recent marketing material, are on top of other monitoring and transaction fees and have not been disclosed in such detail in documents governing earlier funds. The US Securities and Exchange Commission has criticised the industry for passing on charges to clients without their knowledge.

"We've entered a new day," said David Fann, chief executive of TorreyCove Capital Partners, which advises pension plans on private equity investments. "Most investors will request more robust disclosure surrounding fees being paid by portfolio companies to private equity funds."

Private equity firms typically charge annual management fees of 1.5 per cent to 2 per cent of committed funds and keep 20 per cent of profits from investments. They also charge the businesses for buying, selling and monitoring them, though firms have increasingly passed on these expenses to investors in the funds by reducing the management fee.

The fees questioned by regulators are for services provided by consultants, known as operating partners, who are paid by private equity firms for their expertise on various aspects of running a business including recruitment, procurement of goods and pricing strategy.