How Some Private-Equity Managers Collect Big Fees on Paper Gains
The article reports that some private-equity managers are charging performance fees based on unrealized, paper gains rather than actual profits from exits or sales. This practice allows firms to collect substantial fees on investment gains that have not yet been realized in cash, raising questions about fee structures and transparency in the industry.
Background
- Private equity firms typically earn "carried interest"—a performance fee (often 20% of profits) paid to fund managers. This fee is normally paid only after investments are actually sold for a gain.
- This article explains a controversial practice where some PE firms are now charging carried interest on unrealized ("paper") gains—increases in the value of companies they still own, before any sale.
- The shift matters because it allows managers to collect compensation years earlier than usual, on gains that could later evaporate if the investments decline before being sold.
- Key players like Apollo Global Management and KKR have disclosed using provisions that allow early fee collection on unrealized appreciation, drawing scrutiny from regulators and limited partners (the pension funds, endowments, etc. that invest in PE funds).
- This is part of a broader debate over private equity transparency, fee structures, and whether investors are bearing undue risk while managers lock in payouts early.