Cherry Reynard from interactive investor, 6th April 2022:
The management team of specialist private equity investment trust Chrysalis Investments Limited recently drew some unwelcome attention after its managers pocked a £60.5 million performance fee. The trust had seen a strong year, but this was equivalent to more than 8% of the FTSE 250 trust’s net asset value. It has revived a dormant debate on performance fees.
Performance fees have typically been associated with hedge funds. The old ‘2 and 20’ model (2% ongoing fee and 20% performance fee) has made a number of hedge fund managers very rich…
Performance fees are still surprisingly common. Almost 30% of investment trusts (93 out of 337) have performance fees, of which 44% paid out in their last financial year. It tends to be associated with private equity and hedge fund strategies rather than plain vanilla stock market funds and is often seen as a reward for a more activist approach, where a fund manager helps with the strategy of a company or takes a seat on the board.
Criticism of performance fees has tended to focus on either rewards for failure or rewards for very short-term performance. The Chrysalis example has been problematic both for the size of the award and because it was levied on one-year performance. An additional problem is that the performance fee was based on the value of private equity holdings. Unlike normal shares, the prices assigned to these assets may not be immediately realisable.
Signs of a move away from performance fees
In recent years, various trusts have moved away from performance fees or to restructure them to make them more robust. Matthew Read, senior analyst, QuotedData, says: “To simplify fee structures and to make funds more appealing to investors, the trend in recent years has been to do away with performance fees and to make do with a simple base management fee. The best of these are tiered (if a fund doubles in size it doesn’t cost twice as much to run) and charged on the lower of NAV or market cap, which gives managers an incentive to keep discounts tight.”
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