Henry Kravis of KKR (Bloomberg News)
The private-equity gravy train may be coming to an end.
Private equity has long had a reputation for making money from fees even when their fund investors lose.
A recent case in point: KKR, TPG and Goldman Sachs reportedly charged their company, Energy Future Holdings, $528 million in fees over the last five years while the utility veered toward bankruptcy.
But the large public pension funds are forcing the funds to end this type of questionable gouging, sources tell The Post.
The manager of a large public pension’s private-equity program said for the last 24 months he has not committed money to any new private-equity fund that doesn’t give all fees it charges its companies back to investors.
He is doing this because he wants an alignment of interest where he and the private-equity firm only make money by reselling a business.
PE firms, he believes, will stop charging their companies fees if there is little in it for them.
So, KKR, for example — responding to pressure — has agreed to give all fees it charges its companies in its new fund back to investors, the pension manager said.
KKR is not the only firm making this change. Apax Partners, Blackstone Group, Centerbridge Partners, Providence Equity and TPG Capital are among those making the same concessions, the pension manager said.
“The trend is happening, particularly among larger firms,” said Julie Corelli, co-head of Pepper Hamilton’s private-equity fund services group.
She said pensions feel that if PE firms focus less on charging companies management fees it will lead to better returns.
Also, she said it is becoming harder for private-equity firms to say they need to charge their own investors and their companies to cover operating expenses, when it is clear many do not.
PE firms have traditionally charged their companies annual management fees that are equal to roughly 3 percent of their earnings before interest, taxes, depreciation and amortization (Ebitda). And they also charge their own businesses transaction fees for arranging acquisitions, sales or public offerings.
In 2005, PE firms would typically keep half of these fees for themselves. Then investors in 2007 and 2008 pressured them to reduce that haul to 20 percent. Now it is zero, Corelli said.
Meanwhile, the annual fees they charge their own investors have come down in recent years to roughly 1.5 percent of capital raised from 2 percent, sources said.
Corelli said some firms in new fund investments are still charging fees to their companies, but accruing them instead of collecting those fees annually.
They plan to collect when they exit a business, and then give the fees to investors by reducing the management fees they charge.
Apax Partners, Blackstone Group, Centerbridge Partners, KKR, Providence Equity and TPG Capital either declined comment or did not return calls.