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Fees could be subject to ‘significant change’

Fund managers say the private equity and real estate markets are entering a new paradigm, with fees one area set for potential change. Fees, one GP said, had gotten “out of hand”.

The fees charged by private equity real estate fund managers could come under attack as investors “lick their wounds” and nurse their losses during the current economic downturn.

Real estate GPs at a conference in New York today said private equity fees – and that of other alternative asset classes such as hedge funds – were likely to see “significant change going forward” as the US recession deepened.

“We are going to see significant change going forward, although no-one knows how that will shape out,” Brad Wildauer, AREA Property Partners’ US debt leader told the 15th Annual Columbia Business School private equity and venture capital conference.

Although the private equity involved “back-end” provisions, such as claw backs, Wildauer said a “new paradigm was going to evolve” out of the current crisis. “The private equity model has a lot of validity for core investors. But at the same time investors are licking their wounds and concentrating on the losses in their portfolio.”

ING Clarion managing director Jeffrey Barclay said the theory that LP-GP alignment could be achieved through “higher promote” was now being challenged, because – he added – “I think it got a little bit out of hand.”

Barclay and Wildauer said the US economy was facing a period of “pain” over the coming year, with the real estate markets set to be severely hit as real estate fundamentals weakened.

Wildauer added however that is was difficult to predict how “ugly” the markets could become “because no-one knows the values out there. The only sales are distressed sales and until you have a normalized market you really don’t know how ugly things have got.”

The AREA executive said though “the worse it gets the better the opportunity. It’s never fun to benefit from other people’s pain, but there is going to be a lot of pain out there.”