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KKR gives the Washington State Investment Board a discount - charging just 1% for a $250M...

KKR gives the Washington State Investment Board a discount - charging just 1% for a $250M follow-on commitment to the P-E firm's flagship KKR North American Fund. The sticker price on these is typically 2%, but this particular fund has struggled to fill its $8B target raise. Which is the next pension giant to ask for a break? 
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  • Jehan Cauvin
    , contributor
    Comments (6) | Send Message
     
    What we are observing is the evisceration of PE Model pricing power -- it has been publicly reported that KKR's 2006 fund was 1.75% and 20% with no hurdle plus transaction fees, monitoring fees, etc. – the new fund has materially lower fees, for the first time ever a hurdle, and less favorable provisions covering transaction and monitoring fees.

     

    PE firms are now cutting side letter deals with investors who have committed to the new fund for upping their commitments – and in some cases for new investors. Investors feel like masters of the universe for negotiating reduced fees and receiving the “standard issue” most favored nations fee side letter. Unfortunately, investors do not realize that (i) issuers hand out most favorite nations fee side letters all day long, and (ii) everyone in the business knows that the trick in the industry is to "tweak" one or more other terms in the next side letter which allows the issuer to de facto gut all previously issued fee letters because they are no longer identically comparable. Worse yet for investors is that they have no way to police and/and or enforce side letters – they don’t ask and more importantly they don’t audit.

     

    What investors should demand is (i) the addition of a penalty clause in the side letter that issuers are so eager to provide – if the issuer violates the “economic” substance of the side letter, then the parties agree that the investor shall receive damages consisting of the waiver of all fees and carry by the issuer for the term of the fund, and (ii) require that the issuer have their big four audit firm issue to the investor a SAS compliant agreed-upon procedures letter confirming the most favored nations provision of the side letter. These two simple "common sense" requirements would eliminate the chicanery that is currently rampant in the industry.
    28 Feb 2013, 05:20 PM Reply Like
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