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“There is opacity around what fees are actually paid, to whom and for what.” This is one of the conclusions of a new report about rights issues in the UK by a group of institutional investors. The group, known as the Institutional Investor Council, bemoans the fees paid by companies to raise equity capital.
Underwriting fees should be expected to rise during times of stress, given the greater risk that underwriters expose themselves to when managing issues in choppy markets. However, the investor council claims that the average gross underwriting fee since 2007, 3.4%, is unjustifiably higher than the 2.0% average recorded throughout the 1990s. It cites a lack of transparency and limited competition as key factors contributing to the situation. It also notes the common perception among clients of banks and other professional advisors that low fees are a sign of low quality. It then provides this unflattering anecdote:
We were told that extreme pressure could be brought on issuers to pay additional costs, the need for which appeared to come to light only once the process had started. Indeed, one sought to protect itself at the outset from these risks by paying an additional fee dependent on ‘not being held to ransom’ after the process had started.
With lending subdued, retail banks in America are turning to transaction fees to cushion their earnings. A new survey of banks in the country’s largest markets by Bankrate, a personal finance information provider, provides the details.
Average fees for bounced cheques (US$30.47) and use of out-of-network automated teller machines (US$2.33) both reached all-time highs this year. But even if customers stick within their banks’ ATM networks and always remain in credit, fees are still difficult to avoid, with 65% of banks offering no-minimum, fee-free checking accounts (current accounts), down from 76% last year. What’s more, the average minimum balance required to avoid fees on the cheapest fee-paying accounts is now US$249.50, more than double the average only two years ago.
In the context of Lehman Brothers’ mammoth bankruptcy, US$1bn is not a lot of money. Still, it is noteworthy that the administrators of the American arm of the collapsed bank’s estate recently passed the billion-dollar mark when it comes to the fees paid to the army of lawyers, consultants and other advisors over the past two years (US$1,013,116,000 to be precise). The details can be found in a filing made in advance of a hearing on October 20th in bankruptcy court (direct linking is difficult; go here and look for docket no. 12082.) As Bloomberg points out, the fees work out to US$1.3m per day, which may seem steep when creditors are in line to receive 16 cents on the dollar.
Europe’s subdued recovery and ongoing fiscal troubles are taking their toll on investment banks. According to a new analysis by Freeman & Co, a financial services research firm, investment banking fees in western Europe fell by 17% in the first four months of this year.
The pain in western Europe is in sharp contrast to a 53% jump in banking fees in America, an 87% rise in Japan and a whopping 161% surge in China. Banks in India and, perhaps unexpectedly, Eastern Europe also registered robust fee increases.
With credit for leveraged buyouts still scarce, the private-equity balance of power remains with investors. In a report published earlier this month, Bain & Company, a consultancy, makes some predictions about private equity’s prospects “in a future devoid of free-flowing credit, multiple arbitrage and mega-deal opportunities.”
Before conditions improve, investors are looking to “strike while the iron is hot,” as one investor tells Bain, and “rebalance the relationship” with fund managers. On fees, investors think that they have the most leeway to negotiate on transaction and monitoring fees. In the words of another investor in the Bain report, this is the “most abused area” in private equity.
Transaction fees are charged when acquisitions are made by funds and monitoring fees are levied on portfolio companies for advisory services. In its latest survey of the US private equity industry, Dechert, a law firm, reckons that funds charge an average transaction fee of 1.1% of deal size and a monitoring fee of 1.4% of annual operating earnings. In addition to these fees, investors in Bain’s survey are also bullish on renegotiating the traditional annual management fee, suggesting that all expenses unrelated to the performance of funds are under review. How willing, or able, are fund managers to resist?
By most accounts, hedge funds are attracting asset inflows after a long stretch of net redemptions. But investors aren’t willing to fork over funds on the same terms as before. As a result, hedge fund managers are preparing for a “less lucrative, more transparent future”.
Two recent surveys—one of investors, the other of fund managers—paint a picture of widespread haggling over fees, redemption terms and the like. Around 30% of both investors and fund managers say that they have already negotiated lower fees. More notably, 22% of investors who have not yet pushed for lower fees expect to soon, twice the share of fund managers who expect to implement changes to fees.
Given the ill will stoked by Madoff, Rajaratnam et al, as well as the old adage that beggars can’t be choosers—despite recent inflows, assets under management remain well below the pre-crisis peak—investors are more likely to have the upper hand.