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Oxford Endowment Chief Attacks Carlyle’s Conway Over Fees

Oxford University’s investment chief attacked private-equity funds’ charges, saying firms such as Carlyle Group LP are more interested in collecting fees for managing money than generating top returns for their backers.

Larger firms are focused on gathering assets rather than beating the 8 percent minimum annual return fund managers must exceed to receive their share of investment profits, or carried interest, Sandra Robertson, who oversees 1.5 billion pounds ($2.4 billion), said at a conference in London today. She spoke after Carlyle co-founder William Conway said his firm will keep its so-called hurdle rate at 8 percent even as the industry’s returns are likely to be poor for years.

“Entrepreneurs have been replaced by brands and partnerships by organizations,” Robertson told the British Private Equity and Venture Capital Association conference. “Assets under management will drive businesses, as will fee income,” she said. “And Bill, if you’re still in the room, I can understand why Carlyle kept the preferred return at 8 percent. Where’s the economics in Carlyle? It’s not the carried interest: it’s the fees, it’s the management fees.”

Some of the largest private-equity firms including Carlyle have gone public and diversified away from buyouts to target investments such as credit, real estate or hedge funds, in part to satisfy public shareholders who value the shares based on the firms’ recurring fee income. Carlyle, based in Washington, completed an initial public offering earlier this year, joining Blackstone Group LP, KKR & Co. and Apollo Global Management LLC.

‘No Returns’

Conway said today private-equity firms face years of poor returns, amid a deteriorating economic environment and interest rates at record lows.

“I call it the world of no returns,” Conway said in a speech at the industry lobby group’s conference. “Rates of return are going to be very low for a long period of time.”

Returns delivered by private equity over the last 10 years, at about 8.5 percent a year, may not justify the industry’s typical fee structure of a 2 percent management fee and 20 percent share of profits from investments, Robertson said.

Investors would have been better off investing in an emerging-market equity index tracker fund, which would have made 13 percent annually on a fee of 0.5 percent, she said.

She also questioned the logic of the two-and-twenty fee structure, which traces its origins to when traders paid ships’ captains to risk their lives to transport goods overseas.

‘Pay the Captain’

“There’s no longer an alignment of interest,” Robertson said. “You are no longer just paying the captain to sail on a ship. You pay the captain to live quite a different lifestyle.”

Robertson also criticized the way the firms collect money from investors through limited partnerships and charge their backers fees for managing the companies they own.

“The resources and expenses investing through limited partnership structures is a pain in the backside,” she said. “It is as if you make it deliberately hard for us, you make it hard to get in, the tedious fundraising process, the fight for allocations, the pain of partnership documents, the fees. And not just the headline figure, all the tricks we have to look out for such as transaction fees, monitoring fees, fees for paying the fees for your software licenses, fees for visiting limited partners. Come on guys, pay your own bills.”

Oxford, Britain’s oldest university, hired Robertson five years ago from the Wellcome Trust Ltd., Britain’s biggest medical charity, to oversee its endowment. A Carlyle spokeswoman declined to comment on Robertson’s remarks.

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