AP

Bain Capital’s proposed menu of fee structures for its forthcoming flagship fund may be novel among mega buyout firms, but it isn’t the first time it’s been done.

TrueBridge Capital Partners Founder and General Partner Edwin Poston said Swedish firm Altor Equity AB came to market with a similar concept when the Scandinavian buyout firm raised its second fund about six or seven years ago.

“I’m surprised we haven’t seen it more often,” he told attendees at Dow Jones’ Private Equity Analyst’s Limited Partners Summit.

Bain tested out the two-tiered fee structure with its sophomore Asian fund, which set out last year to raise $2 billion, and is slated to close shortly. Sources told LBO Wire that there was an even split among investors as to which option they selected. For its upcoming flagship buyout fund, the firm is also contemplating the addition of a third fee option, one that would involve a .5% management fee and 30% carried interest.

Investors say that a fee structure that involves lower management fees is likely to appeal to LPs that are sensitive to the J-curve, the negative drag on performance that management fees have on a fund early in its life.

While some managers have opted to give volume discounts to limited partners who can write bigger checks, panelists at LP Summit said that could lead to a misalignment of interest. Some investors, which may have backed firms in their infancy, simply can’t afford to write $500 million checks.

“For simplicity’s sake, it’s best to keep a level playing field,” said Canaan Partners General Partner Stephen Bloch.

Giving investors a variety of options, such as Bain and Altor have done, could be a way of appeasing investors on fee negotiations without alienating or showing favoritism to a select group of limited partners.

Top stories in today’s LBO Wire:

It’s conference time here at Private Equity Beat, with hundreds gathered at the Grand Hyatt in Midtown to peer into the curious mind of the limited partner. Yesterday, speakers at the Private Equity Analyst Limited Partners Summit revealed that there’s a new hurdle for general partners raising funds: LPs passing on re-ups in order to trim down their PE commitments or to add new GPs into the mix. They also discussed  a few pitfalls GPs  should avoid during the courting process.

Direct investing by limited partners has been a growing trend, but while the benefits are enticing, most LPs just aren’t cut out for it yet, panelists said. “Every LP wants co-investments, but only a few are staffed for it,” said one executive. Read the full story here (subscription required).

Meanwhile, on the other side of the world, investors continue to be bullish about Chinese private equity, according to industry insiders at the Asian Venture Capital Journal conference in Beijing. Sonja Cheung’s coverage is here (subscription required).

Out in the deal world, Sycamore Partners has finally decided that yes, it does in fact want to buy Talbots Inc., which agreed to a deal totaling $369 million, including debt…After 15 years, Vestar Capital Partners is selling Consolidated Container Co., a manufacturer of rigid plastic packaging, to Bain Capital…and FormulaOne Group, backed by CVC Capital Partners, is pushing back the launch of its $2.5 billion initial public offering in Singapore.

(LBO Wire is a daily newsletter with comprehensive analysis of all the investments, deals, fundraisings and personnel moves involving private equity firms. For a two-week trial, visit our homepage, scroll to the bottom and click “try for free.”)

Elsewhere on the Web:

Speaking of Bain, Bill Clinton has now weighed in, saying that while President Barack Obama will win re-election, he should lay off the attacks on Bain Capital.

The Wall Street Journal talks zombie funds, describing one as a “near-dead fund that ties up investors’ money and continues charging them fees.”

In what would be a big deal for the Japanese private equity industry, Unison Capital is looking to sell sushi chain Akindo Sushiro for nearly $900 million, according to Reuters.

Speaking Thursday during the Private Equity Analyst Limited Partners Summit in New York, Giannini said the historical dynamics of tension between investors and managers of funds–or limited partners and general partners, respectively, in the industry parlance–are being replaced by another kind of battle.

“The fight between general partners and limited partners has played out,” Giannini said.

He said discussion of historically hot-button issues such as the split of transaction and advisory fees are being helped by the Institutional Limited Partners Association’s updated recommendations for terms, he said.

The tension now lies largely within the limited partner community, according to Giannini.

“The looming battle is that LPs are dividing into different kinds of LPs,” he said.

One camp, usually larger limited partners, want lower fees and other favorable terms. Also, more limited partners are doing direct investing or co-investing with general partners, adopting a model that has been advocated notably by Canadian public pension funds, he said.

That has led other limited partners, especially smaller ones, clamoring for more equal footing.

“What was a unified LP community is fragmenting about how to approach GPs, how to invest in GPs, and what to expect from GPs,” Giannini said.

But for some, those cobwebs may not come down that easily–and that can heavily influence the likelihood of winning investor capital, according to speakers during the Dow Jones-organized Private Equity Analyst Limited Partner Summit in New York on Thursday.

“During one deep dive on a portfolio, we could tell there wasn’t a lot of thought that went into the process,” said Weathergage Capital Managing Director Courtney McCrea. “We started with their largest investment, then on to the second, third and fourth largest and it soon became apparent that they were just sending good money after bad.”

“Then the GP said ‘you’ve picked all the hardest assets to talk about!,” she said. “It was a quick way to understand that we wouldn’t be investing with them.”

Wellesley College Director of Investments Kathleen Browne had a similar experience, during which a general partner continued to invest money in an asset that the limited partners knew was under water. It later came out that the GP had consulted with a lawyer to see if it was required to meet with the advisory board before extending a bridge loan to the company–financing that was entirely lost when the investment soured.

“If GPs are slow to write down an asset, it sends a bad signal,” said Thad Gray, managing director and chief investment officer of Abbott Capital Management. “It conveys that either they don’t think you’re that bright or that some of its other companies may also be over-valued.”

Additionally, general partners should take care to respond quickly to requests for information from limited partners. Delays can be construed as a lack of transparency or an unwillingness to be forthright.

“If you ask for specific information before committing and you don’t get it, you can bet that once you have committed it will take even longer to get that information,” said Gray.

A soured investment–or worse, a soured fund–might be difficult to bounce back from, but not impossible. Steve Costabile, managing director and head of the private equity funds group at PineBridge investments, cited one manager PineBridge re-upped with despite a “black hole fund” on its track record.

Costabile said the firm had a clear understanding of where they had gone wrong- that too much momentum and too much capital had clouded the vision of the overall portfolio. Understanding the need to regroup and get back to their specialty, the firm was able to retrench and came back stronger with its next fund. The lesson being, a black eye isn’t impossible to recover from, as long as you don’t try to cover it up.

“Don’t try to pretend you’re something you’re not,” said Costabile.

Top stories in today’s LBO Wire:

A lot of people will go out of their way for a good cup of coffee. Emerging Capital Partners is going all the way to Kenya. The emerging markets-focused private equity firm is investing in restaurant and cafe chain Nairobi Java House. ECP Managing Director Bryce Fort said Java House will likely move beyond Kenya’s borders in the next couple of years.

While ECP heads to East Africa, Warburg Pincus is turning north for its latest deal. The New York firm has committed 155 million Canadian dollars ($150.4 million) to Canadian unconventional gas exploration and production company Endurance Energy Ltd., LBO Wire’s Jonathan Shieber reports. Unconventional drilling involves gas extraction without a well, not drilling with hundreds of tiny souvenir corkscrews while listening to the music of Bjork, however unconventional that might be. Read the full story here (subscription required).

Also, Leonard Green & Partners closes its sixth private equity fund at $6.25 billion…Bain Capital is looking to woo investors with a raft of new options for its latest fund, for which the firm is preparing to seek as much as $8 billion…and Performance Food Group, a food distributor backed by Blackstone Group and Wellspring Capital Management, is acquiring Institution Food House from Alex Lee Inc.

(LBO Wire is a daily newsletter with comprehensive analysis of all the investments, deals, fundraisings and personnel moves involving private equity firms. For a two-week trial, visit our homepage, scroll to the bottom and click “try for free.”)

Elsewhere on the Web:

Prominent Republican politicians have taken an interest in a North Carolina bill that would place new strictures on dental management companies, a favored investment for private equity firms, Bloomberg BusinessWeek reports.

Also from Bloomberg, China Investment Corp. is said to have lost two executives from its private equity department.

Dow Jones’ Gabriele La Monica reports that CVC Capital Partners and Clessidra Capital Partners are preparing an offer to buy Cinven’s 81% stake in Italian aerospace group Avio.

ING Private Equity Access reduces its debt facility and pays off its first dividend in years in a sign that the liquidity freeze for listed private equity investors is thawing, though too late for ING, which has been winding down its private equity portfolio since 2009, reports Paul Hodkinson of LBO Wire’s U.K. sister publication Private Equity News (subscription required).

Top stories in today’s LBO Wire:

Personable General Insurance Agency Inc. is now bigger in Texas. The Excellere Partners-backed provider of nonstandard insurance coverage is expanding its presence in the Lone Star State with the acquisition of Endeavor General Agency. The deal is Personable’s second add-on acquisition since Excellere partnered with Align Financial Group founder Kieran Sweeney last year to spin out Align’s auto insurance business and form Personable. The company’s nonstandard insurance covers higher-risk drivers such as those with prior violations or no previous insurance coverage, or maybe this guy in Iowa who allegedly drove drunk with a zebra and a parrot as his passengers. He seems pretty nonstandard.

Genstar Capital, meanwhile, is driving much more soberly toward its next fund closing. Genstar has sweetened the terms for its newest fund, agreeing to lower the management fees and carried interest as the San Francisco firm nears the fund’s target, which has been reduced by $500 million, Laura Kreutzer reports for LBO Wire. Read the full story here (subscription required).

Also, Morgan Stanley Private Equity Asia targets $1.5 billion for a new pan-Asian fund…Trilantic Capital Management targets $2 billion for its fifth fund…and Sprouts Farmers Market, a grocery chain backed by Apollo Global Management, acquires Sunflower Farmers Market for an undisclosed sum.

(LBO Wire is a daily newsletter with comprehensive analysis of all the investments, deals, fundraisings and personnel moves involving private equity firms. For a two-week trial, visit our homepage, scroll to the bottom and click “try for free.”)

Elsewhere on the Web:

Pep Boys-Manny Moe & Jack has officially ditched a plan to be taken private by Gores Group, terminating its agreement with the private equity firm, Dow Jones Newswires’ Nathalie Tadena reports (subscription required). LBO Wire previously reported that Gores appeared to be getting cold feet after kicking the tires on the roughly $804 million deal and urging Pep Boys shareholders to delay a meeting to allow the firm to determine whether weak first-quarter results constituted a materially adverse change to the conditions of the deal. Pep Boys will get a $50 million termination fee after pulling out of the transaction.

U.K. firm 3i Group is in talks with Invesco to acquire its European collateralized loan obligation portfolio, reports Ayesha Javed of LBO Wire’s sister publication Private Equity News (subscription required).

Dow Jones Newswires’ Yoree Koh, Kana Inagaki and Ian Berry report that Japan’s Marubeni Corp. is buying U.S. grain handler Gavilon Group for about $3.6 billion. Gavilon was formed after a 2008 acquisition led by Ospraie Management, General Atlantic and Soros Fund Management.

The Wall Street Journal reports that the communications director for Cory Booker abruptly resigned after the Newark, N.J., mayor was criticized for comments he made on NBC’s “Meet the Press,” complaining about President Barack Obama’s attacks on Mitt Romney’s record at Bain Capital.

CVCI Private Equity and a co-investor advised by Thai Strategic Capital acquired a “significant” minority interest in Thai skincare company Wuttisak Clinic Inter Group Co., according to Reuters.

Reuters

LPs and GPs. Where do the benefits flow?

The following guest post comes from Avneet S. Kochar, former Director, Alternative Investments, AT&T Investment Management Corp.

By Avneet S. Kochar

A ratio is a succinct quantitative gauge of measuring a relationship between two variables. The world of public equities has ratios like Sharpe, Sortino and Treynor, which provide an investor with a quick snapshot of reward (alpha) as compared to the risk (usually volatility/standard deviation) taken to earn that reward.

The private equity world doesn’t really have any ratios for limited partners to evaluate reward versus risk. Through this note I am proposing a simple ratio that would help LPs get a quick snapshot of the “Alignment of Interest” that all investors seek when making private equity commitments.

The ratio is calculated simply as carried interest earned by a general partner divided by the management fees paid to the GP. The ratio provides the LP with a comparison between carried interest (which LPs would like to maximize indirectly) and the fixed management fees that an LP pays to a GP (which LPs would like to minimize).

This simple ratio of carry/management fees can also provide an excellent snapshot of how much investors have benefited (reward) in return for the management fees (risk/cost) paid on committed capital  after making a commitment to the fund. The ratio also provides a good sense of how important carried interest is to the GP for running their alternative investment management business.

The ratio, which we can refer to as Alignment of Interest (AOI) ratio, can be calculated over a GP’s entire firm or on a particular fund (both retrospectively and prospectively). For example, in the case of a publicly traded alternative investment manager, a prospective investor evaluating a new fund can look into a 10-K and determine what portion of a GP’s revenue is coming from management fees and what portion is coming from carried interest and can easily work out an AOI ratio.

Now let’s take a practical example from the 10K of a publicly traded alternative investment manager. Over the past five years management and advisory fees earned by that manager have been $7.9 billion and carried interest has been around $2.2 billion. In order to calculate the AOI ratio we deduct approximately $2.0 billion of advisory fees to come out at $6.0 billion of fixed management fees (this is the 2% in a 2/20 model) and $2.2 billion of performance fees (this is the 20% in the 2/20 model) which give us an AOI ratio of 0.37.

What inferences can be drawn from this AOI ratio of 0.37?

1. For every dollar of carried interest earned, the GP charged LPs $2.7 in management fees (1/AOI ratio).
2. From a business perspective the management fees are a much larger component of the total revenue than the carried interest so LPs should accordingly calibrate the often repeated statement “We are totally aligned with our investors!”
3. In order to restore alignment of interest and improve the AOI ratio, there should be either smaller-sized funds or a lower percentage of management fees as in the current set up the LPs are not being rewarded for the risk (fixed management fees on committed capital)

Another use of the AOI ratio could be to calculate it prospectively on a single fund. Let’s assume that LPs have determined that an appropriate AOI ratio should be at least 1.0 to ensure alignment of interest i.e. the GP should earn at least as much carried interest as it charges fixed management fees. Because the management fee stream is fixed and can be calculated over the life of a fund, all an LP needs to do is to calculate a range of multiple and IRR performance numbers that the underlying fund would have to generate to get to an AOI ratio of 1.0.

A scenario or probability analysis can then be worked out on those hypothetical multiple and IRR ranges to check if they pass the smell test, and also determine how many of the previous funds coming from GP’s stable have generated similar multiple and IRR results.

I hope that this simple AOI ratio can be one of the many tools that LPs can use during the due diligence process while evaluating fund commitments. Also, from the GP’s perspective they can start calculating an AOI ratio proactively and present the same to the LPs to differentiate themselves from their competition.

Here’s a look at the top stories in this morning’s LBO Wire:

Things Remembered is now just that for Bruckmann Rosser Sherrill & Co. and GB Merchant Partners. The two firms have exited the personalized gift retailer after roughly 6 years of ownership. Mike Wursthorn has details on the new owners and the transaction here.

Global Infrastructure Partners has charged past its $5 billion goal, collecting more than $5.5 billion, Jon Shieber reports.

And some stories exclusively available to LBO Wire subscribers: Platinum Equity is zipping toward a second close for its third fund, Laura Kreutzer reports . . . Atalya Capital Management has closed on $75 million for its first SBIC fund . . . Our Private Equity News colleague Dan Dunkley reports PAI Partners has launched premarketing for its latest fund.

(LBO Wire is a daily newsletter with comprehensive analysis of all the investments, deals, fundraisings and personnel moves involving private equity firms. For a two-week trial, visit our homepage, scroll to the bottom and click “try for free”)

Elsewhere on the web:

GS Capital Partners is partnering up with Interline Brands’ shareholder P2 Capital Partners to buy the distributor of maintenance, repair and operations products for $1.1 billion. The press release is here.

Australia’s largest banks are officially out of the private equity business, Caroline Henshaw reports over at Deal Journal Australia. National Australia Bank Ltd. said it would wind down its PE arm, a move which follows a write down on a portfolio company that moved into receivership earlier in 2012.

European companies are tapping the U.S. leveraged loan market at a blinding pace, borrowing roughly EUR14.4 billion year to date, The Wall Street Journal reports. That’s more than double the EUR6.7 billion borrowed during all of 2011, and tops the record EUR12.2 billion in lending during 2007.

Talbots’ shares plummeted lower than summer necklines as Sycamore Partners scrapped its offer for the women’s wear retailer. Read on via Dow Jones Newswires’ here.

After years of attempts to exit its stake in Korea Exchange Bank, Lone Star Funds is considering filing arbitration claims against the Korean government over its unwillingness to approve any buyers, according to Deal Journal.

Chicago Business takes a look at the state of private equity in the Windy City, including who has been raising money and who hasn’t.

The Chicago firm purchased the business from Bruckmann Rosser Sherrill & Co. and GB Merchant Partners, the private equity arm of Gordon Brothers Group; the pair acquired the company in 2006 for about $200 million from eyewear retailer Luxottica Group SpA.

It’s unclear how the two firms faired on the exit, but while under the six-year ownership of Bruckmann Rosser and GB Merchant, Things Remembered’s revenue doesn’t seem to have grown much and its footprint appears to have shrunk.

Although neither of the sellers responded to requests for comment, the buyout duo alluded to the challenges of owning the gift retailer in their joint statement announcing the deal.

Bruckmann Rosser said it owned the company amid a “difficult economic environment,” but added that it was “pleased” with the outcome of its investment.

GB Merchant, which has offices in Boston and New York, on the other hand described its 2006 purchase as a “complicated transaction” that stemmed from the firms’ need to reposition and remerchandise the business during its holding period.

And during the firms’ ownership there appears to have been some revenue growth—but nothing worth engraving.

New York-based Bruckmann Rosser and GB Merchant said in 2006 that Things Remembered booked about $300 million of revenue in 2005 through the business’ 653 locations – compared to more than $315 million in total revenue through 640 stores for the last fiscal year ended Jan. 28, according to a recent note by Moody’s Investors Service.

Things Remembered, based in Highland Heights, Ohio, sells gifts ranging from jewelry to picture frames to paperweights for occasions like graduations, Father’s Day and anniversaries through its website and through a network of stores in the U.S. and Canada. The company offers personalized engraving and monogramming for many of its gifts.

Madison Dearborn contributed about $163 million of equity to its buyout, while the remainder of the deal was financed through proceeds from a $147 million senior secured credit facility and a $30 million mezzanine note, according to a Standard & Poor’s Ratings Services disclosure.

Madison Dearborn declined to comment beyond the statement.

CCMP Capital Advisors

Les Brun, managing director, CCMP Capital Advisors

In the private equity world, there are typically two camps of people: general partners, who manage funds, and limited partners, who invest in those funds.

Historically, the demarcation between the two camps has been quite distinct.  Occasionally, however, people break from one camp to join the other.

A few years ago, Larry Schloss, for instance, left Diamond Castle Holdings, a firm he co-founded, to become the chief investment officer of New York City’s public pension funds.

Les Brun, managing director of buyout firm CCMP Capital Advisors, had made a similar move – only in the opposite direction. Brun had built one of the largest private equity advisory businesses as founder and former chairman emeritus of Bala Cynwyd, Pa.-based Hamilton Lane.

In September, however, Brun moved to the other side of the fence, joining CCMP to lead its investor relations function. We recently caught up with Brun to get his take on his career move.

PE Beat: Why did you leave Hamilton Lane?

Brun: It’s always good to go out on top. When I left, Hamilton Lane was – and still is – on an upward trajectory. Inevitably for entrepreneurs, it comes to a point when they are more a manager than a doer. And I found that I am not as good a manager as I am a doer. Personally, it is the investing and the conduct of due diligence that really fascinates me.

PE Beat: What did you do after you left, and why did you join CCMP?

Brun: After I left Hamilton Lane, I was still a limited partner investing on behalf of my family. I felt that CCMP is differentiated, but because it grew up under a bank umbrella, it didn’t know how to tell its story. And I felt that this is a good story that’s worth telling.

PE Beat: What is your biggest surprise so far since you took your job?

Brun: My biggest surprise is how LPs are much more sophisticated over the last three to four years, due in part to the financial crisis. They are more critical and circumspect in what they do…My experience [as a former LP] gives me as clear a sense as anyone about how LPs think, what LPs want to see, and what hot-button issues are.

Brun will share more of his thoughts on the industry in a keynote interview at the upcoming Dow Jones Private Equity Analyst LP Summit in New York.