A question of fees

We broke the news this week that American International Group, one of the US’s biggest insurers, is selling a portfolio of private market fund stakes worth a cool $2.3 billion.

The deal has already attracted bids from secondaries buyers and, if the portfolio trades at the purchase price, would be one of the five largest portfolio sales of all time. With a couple of other large portfolios in the market, the year is already shaping up to be a promising one for deal volume.

The proposed sale caught our attention not just because of its size but because the firm has decided not to engage a sellside advisor for the process. New York-headquartered AIG, a central player in the global financial crisis of 2007-08, declined to comment on the sale, but it clearly believes it can run the process and achieve more in proceeds than it would using an advisor.

A back-of-the-envelope calculation shows that an advisor charging even 20 basis points – probably the lower end for a deal of this size – on a $2.3 billion portfolio could earn $4.6 million. If the portfolio trades at par to net asset value, a sale price of $2,295,400,000 or more would make not hiring an advisor worthwhile, in purely financial terms. In other words, if a seller gets a price higher than an advisor could have found, net of fees, the seller might as well run the process.

This is exactly what Montana Board of Investments decided to do in 2016. The US pension saved around $100,000 in fees when it sold stakes in two buyout funds without the help of an intermediary.

What Montana discovered, though, was that selling stakes on your own isn’t a walk in the park. According to the pension’s director of private investments, Ethan Hurley, the process was “fairly onerous” with lots of paperwork back and forth. For a pension fund or endowment with a skeleton staff and limited resources, trying to maximise price discovery on your own can eat into time better spent making new investment decisions.

It is rare for limited partners to sell private markets portfolios without advisors: Campbell Lutyens estimates they accounted for 5 percent of processes last year.

Advisory fees are a favourite topic of discussion among Secondaries Investor sources and one that often stirs vigorous debate. The way in which fees are charged also varies among advisors – we are aware of at least one intermediary which reportedly tells potential sellers it won’t charge them fees, then builds the fee into the buyer’s price, so less money comes to the seller. Those unaccustomed to the ins-and-outs of secondaries sales are none the wiser and assume the intermediary found them the best price.

If the AIG deal is a success, it might set a precedent that gives advisors a few sleepless nights.

What’s your view on the subject? Let us know: adam.l@peimedia.com or @adamtuyenle