Buyout firms earn more from fees

Buyout firms make almost twice as much money from fees paid by clients than from selling companies, according to a study by two academics at the Wharton School.

Leveraged buyout (LBO) funds collect $10.35 in management fees for every $100 they manage, almost double the $5.41 they get from selling companies at a profit, according to Andrew Metrick and Ayako Yasuda, finance professors at the University of Pennsylvania's Wharton School in Philadelphia.

The figures are based on 1992 to 2006 data from 144 funds provided by an unidentified institutional investor, according to the report.

Buyout firms typically charge investors a management fee of 1.5 percent to 2 percent of the fund, and they keep 20 percent of the profit from selling investments.

That structure hasn't changed even as firms like Blackstone Group LP raise record buyout funds from institutional investors and draw scrutiny from politicians about the tax they pay on their profit.

"The institutions give us the same terms essentially for a 100 million-pound ($202 million) fund as for a 10 billion-pound fund, 100 times the fees and income,'' Jon Moulton, Alchemy Partners, managing partner, said in July.

"The costs of running the funds do not go up by a factor of 100. The institutions could, if they wished, hang out for better terms.''

Lawmakers in Washington and London are probing private equity firms' tax arrangements amid labor unions' calls for companies to pay more. Dealmakers' profit, or carried interest, is taxed as a capital gain instead of income. In Britain, dealmakers pay a tax rate of 10 percent instead of the 40 percent income-tax rate.

The Wall Street Journal reported the study's findings earlier today.