Comments on: Should We Pay Up For Performance?

By: ITinvestor

ITinvestor — Sun, 24 Nov 2019 14:31:53 +0000

In reply to chrisB.

@chrisB

Yes, I have Caledonia. I’ve written about it a couple of times, most recently here: https://www.itinvestor.co.uk/2019/08/caledonia-bets-big-on-private-equity/

The ongoing charge seems on the high side at 0.9% for £2bn of assets but not too outlandish. I’m not so worried about the double-counting of the directors’ fees and ownership, though. You’re going to end up paying some sort of management charge for a trust – in Caledonia’s case this is (mostly) paid directly to the directors rather than being a fixed % of assets. And there are many members of the Cayzer family not directly involved in managing the fund.

What’s a little more jarring perhaps is that a lot of the money is invested in other funds, which in turn have their underlying costs. Trusts that invest in other funds, in effect outsourcing a lot of the legwork on the research front, should really have signficantly lower management charges.

@Nicholas Barker

I’d agree that low performance hurdles like Tetragon’s usually aren’t the way to go. I don’t mind them so much if the base fee is very low and there’s a high watermark or clawback, but none of these apply with Tetragon.

By: chrisB

chrisB — Sat, 23 Nov 2019 15:00:11 +0000

I have a shareholding in Caledonia Investments which I think is also in your portfolio.
Your comment on doubling-up on fees is something I’ve long thought about for Caledonia – an ongoing charge of 0.92% is fine for what is a private-equity hybrid fund. The chunky performance bonus for the directors also looks OK in isolation.
But when you consider the directors and their wider family trusts own almost 49% of the fund it starts to look a bit too generous, as there’s a double upside for them.
Your thoughts on this specific fund would be welcome.

By: Nicholas Barker

Nicholas Barker — Tue, 19 Nov 2019 19:47:24 +0000

I’m not so keen on performance fees, especially if they apply to some feeble benchmark target like CPI +3% and/or take a slice in good years but give nothing back for under-performance in bad years. As a general rule I would say that these are there for the benefit of the manager, not the investor. No competent manager will perform any better because of performance fees.
I do have some Tetragon and while I don’t like the fees, or the corporate governance, these are just about palatable so long as it continues to turn in impressive performance, and are somewhat mitigated by the high level of manager money in the fund. There is also the possibility that the ridiculous 50% discount might someday narrow, so there is some speculative upside there.