Management Fee Conversion Under Attack – Why now?
September 04, 2012Miscellaneous
The New York Times and many other news sources broke a story this weekend about the NY attorney general subpoenaing several major private equity firms, including Bain Capital, among those, for allegedly abusive management conversion fee practices. I don’t have access to the subpoenas but the NY Times article describes the strategy in sufficient detail, a strategy that has been known to me as “fee conversion” or a “fee waiver.” In this strategy, the manager waives, or hard wires a conversion, of the management fee so that it receives a larger percentage in the carry. I would not discuss the merits of this strategy because the outcome may very well depend on how exactly the conversion is structured and the ultimate economics behind it. However, I want to say that this strategy has been around for a very, very long time. On top, the strategy has not been hidden or used surreptitiously, but has been out in the open, and even discussed in Mr. Needham’s BNA private equity portfolio, and I believe, in yours truly, private equity tax book. Mr. Needham surmises in his treatise that the IRS has been aware and looking into this strategy since 2007. I don’t want to be a conspiracy theorist, but why subpoena now, in an election year, and why exactly Bain Capital? Oh my…, could it be a below the belt punch against Mitt Romney? I don’t know. I just know that this strategy has been around for so long, and has been perceived as acceptable by too many practitioners, to be a headliner in the NY Times, nonetheless, in an election year. Tags: