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Comment: No need to regulate private equity managers’ pay

Mark Spinner, partner and Head of Private Equity at Eversheds, outlines his views on the news that Sweden will attach an annex dealing with the pay of private equity fund managers to the latest list of suggested amendments to the EU’s draft alternative investment funds legislation.

The suggestion emanating from Sweden that there needs to be tighter control on the pay of private equity executives illustrates the significant range of views on this subject across Europe at present.

In my view there is no need to regulate Private equity pay for a couple of reasons. First, the private equity industry does not represent a systemic risk to the financial communities across Europe to the same extent (if at all) as the banking sector since the vast number of private equity investment houses
invest third party funds on behalf of sophisticated investors through a limited partnership structure.

Those captive private equity investors which invest their own or their parent company’s own funds (so called balance sheet investors) represent a very small proportion of the overall market and in the vast majority of cases a very small part of the funds available to invest.

Added to this is the fact that even in the very largest of all private equity investors, where the management fee payable by the limited partners each year may run into hundreds of millions (typically an annual fee of 2% of funds under management is not unusual) this sum has to cover all of the infrastructure costs of the private equity house as well as salaries and as such even when bonuses are included remuneration of private equity investment partners and executives is relatively modest in the global scheme of things.

Where the investment partners/executives are able to really generate wealth is through the carried interest schemes and co-investment schemes operated by the funds to ensure goal alignment between those that are investing the funds under management and those that are providing the funds.

Since all of the reward derived from such schemes is linked to performance of the investments made (typically 20% of the growth over a hurdle rate of return) it would be inappropriate to cap or restrict this element since it would reduce the incentive on the investment executives to do well.

These types of structures have been around for many years and have worked well to help the private equity industry deliver top quartile performance returns outperforming most other asset classes. As the saying goes "…if it isn’t broke don’t fix it….”

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