Blackstone cuts controversial fees

Stephen A. Schwarzman, Chairman and CEO, The Blackstone Group, USA.
Source: Wikipedia
Stephen A. Schwarzman, Chairman and CEO, The Blackstone Group, USA.

One of the world's largest private equity firms is dropping a controversial type of fee it charges clients.

Blackstone Group will no longer charge so-called "accelerated monitoring fees," according to The Wall Street Journal. Monitoring fees are payments a PE firm pockets from companies it buys for ongoing consulting. When one of those portfolio businesses is sold or taken public, Blackstone and others have previously collected a lump sum payment for future monitoring fees, which can be guaranteed for 10 years or more.

Blackstone will now drop those "accelerated" fees from new deals and share money from current companies with the investors in its funds, according to the report.

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A spokesman for Blackstone declined to comment on the WSJ story.

The practice has come under scrutiny from the Securities and Exchange Commission. An SEC official recently called those and other types of PE fees "troubling."

"Despite the fact that private equity holding periods are typically around five years," Bowden explained, "some advisers have caused their portfolio companies to sign monitoring agreements that obligate them to pay monitoring fees for ten years…or longer," Andrew Bowden, the SEC's director of compliance inspections and examinations, said in May. "Some of these agreements run way past the term of the fund; some self-renew annually; and some have an indefinite term."

He also said the fees were "hidden" from clients.

"There is usually no disclosure of this practice at the point when these monitoring agreements are signed, and the disclosure that does exist when the accelerations are triggered is usually too little too late," Bowden added.