Investors push for more favourable fees and terms

London: "There's never been a better time" for institutional investors "to press our case", says Joseph Dear, chief investment officer of CalPERS, America's largest public-pension fund. "We're determined to make the most of it."

So far Dear has been true to his word. Last month CalPERS persuaded Apollo Global Management, a large private-equity firm, to scrap $125 million (Dh459 million) in fees over five years. Dear plans to bargain aggressively with other private-equity firms (known as "general partners") to bring down fees, and he has urged other investors ("limited partners") to do the same.

During the buyout boom, general partners could levy high fees and investors would still flock to them. But now fund-raising is a challenge. Investors are banding together to get better deals. In September the Institutional Limited Partners Association (ILPA), issued a set of best practices that general partners should consider accepting if they want limited partners' business. It calls for greater transparency, more favourable contractual terms and more generous profit-sharing.

Proponents of ILPA's guidelines say they have helped limited partners negotiate lower fees. Limited partners insist management fees shouldn't be a source of profit for general partners, and in some cases are demanding to sit down with them to find out what their real costs are. As a result, the average management fee at buy-out firms trying to raise capital fell by 20 basis points between 2008 and 2009, according to Preqin, a research firm. Larger firms cut their fees the most.

Investors are also attacking the issue of "deal fees", which general partners charge the companies they own for such services as completing transactions and advising them. Some funds have allowed investors to recall some of their capital commitments.

Regulations could change these dynamics, says Colin Blaydon, a professor at Tuck School of Business at Dartmouth. A proposal being considered by Congress to treat general partners' profits as income rather than capital gains, which are taxed at a lower rate, could cut into margins and make them less willing to make concessions to limited partners. For now, though, investors are enjoying the upper hand.