Private equity funds seen shrinking

By Simon Meads

LONDON (Reuters) - Private equity funds will shrink rather than cut management fee percentages as investors seek to bring firm's rewards back in line with their returns, said the chief executive of Hermes private equity.

"I think it is more likely that you will see a change in the size of funds rather than fee structure," Rod Selkirk told Reuters.

Selkirk, who manages 1.5 billion pounds of assets for BT Group's pension scheme, the country's largest, said the growing levels of management fees and carried interest which have gone with increasing fund sizes have caused a divergence in interests between fund managers and investors as firms get rewarded for relatively mediocre performance.

Private equity firms have historically charged a 2 percent management fee on top of their carried interest, a performance fee which allows them to take 20 percent of a fund's returns in exchange for putting in just 1 or 2 percent of their own money.

Solomon Owayda, the chief investment officer of SVG Advisers, an arm of SVG Capital Plc SVI.L, the largest investor in European buyout specialist Permira, recently criticised management fees for allowing firms to make hundreds of million of dollars from large funds.

With U.S. firm Blackstone (BX.N) in the process of raising a $20 billion buyout fund, and UK-based CVC Capital Partners CVC.UL looking to raise 11 billion euros, the firms could earn $400 million and 220 million euros respectively from management fees alone.

Selkirk said the management fee charged by large funds was unlikely to be as high as 2 percent, however. "It's really between 1 and 1.5 percent" he said.

(Editing by Jon Loades-Carter)