“We are playing a game of cat and mouse with regards to what general partners are narrowly defining as monitoring fees.”

This is the view of Eamon Devlin, managing partner at fund lawyer MJ Hudson, who notes that while monitoring fees have improved for limited partners – many now being offset by management fees or scrapped altogether – some private equity houses are still taking value from portfolio companies, and therefore the LPs, by other means.

Monitoring fees were historically a point of contention in the asset class. Portfolio companies were expected to cover the costs incurred in managing an asset, such as expenses for consultants and travel costs for board directors.

Seventy-three percent of GPs now either offset 100 percent of the costs against a fund’s management fees, or have ceased to charge them, according to the pfm Fees and Expenses Benchmarking Survey.

“Since the global financial crisis it’s really become the norm that portfolio companies shouldn’t really be seen as cash cows for the management company,” Jean-François Le Ruyet, partner at fund of funds Quilvest, tells pfm. “On the other hand we’re also aware that not all GPs are alike, and while some things could be understandable coming from a manager which has smaller revenues, it’s less so when there is room to pay from the profit and loss of the GP.”

Part of this shift at the upper end of the market can be attributed to a heady fundraising environment, Devlin says. As assets under management continue to soar, so too does income from management fees, meaning GPs are more at liberty to offer attractive concessions, such as offset monitoring fees, to their investors.

Another reason for the improvement is heightened regulatory attention in the US. Thomas H Lee Partners had agreed to pay out $6.5 million in July over the way it had charged portfolio companies with accelerated monitoring fees – essentially the lump sum fee paid to cover the remaining term of the consulting agreement when a company was exited early. Blackstone and TPG Partners also fell foul of the Securities and Exchange Commission over accelerated fees in 2015 and 2016 respectively.

These advances bely a dark trend. Monitoring fees are subject to a precise legal definition that is outlined at the start of a fund’s life within the limited partnership agreement, meaning other income that falls outside of this bracket is not subject to any potential offset, Devlin says. For example, a GP may own a business that needs to hire more staff and therefore appoints a recruitment agent from its existing portfolio.

“The onus is also on the LPs to be more precise and discuss with the GP what is acceptable and what is less so,” Le Ruyet adds. “We need to apply a bit of pragmatism; at the end of the journey, what is important is what we believe is going to be net to the investor, which is why LPs sometimes accept funds which have economics which are not the classic cookie-cutter.”

For additional articles, go to Fees & Expenses Survey 2018 .