Private equity seeks new model to cut advisers’ fees

Accounting firms are at risk of losing millions of pounds in due diligence
fees as buy-out groups begin floating on public markets, the chief executive of
FTSE 100 private equity firm 3i has warned.

Speaking at CIMA’s biannual Anthony Howitt lecture, Philip Yea said private
equity firms were looking to list on public markets in order to slash advisory

‘The requirement for liquidity means that buy-outs get exited every two to
three years. And every two to three years about 3% of the value leaks out to
accountants, lawyers and other people. There is a friction cost to private

‘I can see a world where we will be able to do it in pools that remain
quoted; where you do not have to exit the asset after three years and leak 3% to
5% of the value out,’ Yea said. The top 50 firms earn £875m form corporate

Listing pools of funds will provide private equity with a new form of
liquidity, enabling them to transact without having to go through a due
diligence exercise every time a business is acquired or sold.

Support for the model is already gaining momentum. Private equity giants
Kohlberg Kravis Roberts and Fortress have pursued such listings, 3i has floated
an infrastructure fund and Blackstone is preparing an initial public offering in
the US.

Yea predicted that within 10 to 15 years almost all private equity groups
would be structured in this way.

The growing popularity of the trend will be of concern for firms, which have
been banking on buoyant merger and acquisition revenues to sustain the
double-digit growth that has been driven by IFRS and Sarbanes-Oxley.

But Alan Murray, chief executive of FTSE 100 group Hanson, questioned the
viability of such a model. Quoting from the prospectus for the upcoming
Blackstone float, Murray said that the private equity fund was planning to limit
shareholders’ voting rights and refuse investors the right to elect directors or
partners. It would also be exempt from holding an annual meeting and other
corporate governance requirements.

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