Why do PE firms charge monitoring fees just to offset them?
Hey all, I was reading a bit about how private equity firms make money and came across monitoring fees and offsets for LPs. I think I understand why offsets exist and that without offsets, LPs are effectively double-charged.
But I don't understand why GPs bother with monitoring fees if they're ultimately going to offset them. I know some firms don't do 100% offsets, but it seems like the vast majority do according to this article.
Is it a timing issue? Do GPs just get to extract value earlier from portcos by doing this and then offset the mgmt fee later?
Is because not all monitoring fees are offset, since the GP has some capital of their own invested in the fund?
Any guidance would be appreciated. Thanks
GPs do this because called capital (for both deals and fees) has a ticking hurdle accruing (e.g., 8%) and monitoring fees can be used to payback this capital and avoid a compounding hurdle to overcome - thereby getting to carry faster in a fund cycle. I'm sure there are some errors in my terminology here but believe this is directionally the strategy.
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I thought it was because that’s how the 2% out of the 2 and 20 gets paid. I.e. that’s what keeps the lights on and pays my paycheck etc.
Maybe also what you’re saying of course. But not like it’s a huge chunk of the deployment generally, but I suppose it would still of course limit the compounding.
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