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Why a secondaries firm temporarily waived fees

Newbury waived fees for the first few months of its last two funds, but the firm won't do the same next time around.

It’s no secret that US secondaries fund manager Newbury Partners has had great success on the fundraising trail recently, quickly beating its $1 billion hard-cap for Fund III earlier this year.

And that was hot on the heels of a $1 billion Fund II closed in 2010. Their experience certainly illustrates just how in-demand secondaries firms with decent track records can be these days.

Richard Lichter
Richard Lichter

But what you might not realise is the firm voluntarily waived management fees for investors in those funds after their respective first closes for about four or five months. The reason relates to how quickly Newbury garnered commitments: the firm had completed fundraising for Funds II and III much faster than expected and therefore wasn’t finished deploying capital from its prior funds.

When Newbury held a first close on Fund II (and would therefore have begun collecting management fees on committed capital), only about 80 percent of Fund I had been deployed. Similarly, when Fund III held a first close, only about 85 percent of Fund II had been deployed

“You hope fundraising takes a year, sometimes it takes longer; but we had our first closing in 30 days [for Fund II] and that happened even quicker for Fund III,” managing partner Richard Lichter told me over coffee in New York this week.

The way he explained it was that LPs had been more than fair to Newbury while it was on the fundraising trail, so the firm wanted to reciprocate the goodwill by waiving fees.

“I didn’t want to award that quickness [with which LPs made commitments] by then charging the LPs money.” It would simply be unfair to charge fees when Newbury wasn’t yet working to deploy the new fund(s), he said.

After catching up with Lichter, I couldn’t help but wonder whether Newbury was alone or if other GPs, particularly those focused on the secondaries market, have regularly been giving investors the same sorts of fee holidays.

Erica Berthou, a partner at Debevoise & Plimpton, told me this wasn’t really a new trend nor unique to Newbury, but that it wasn’t widely done, either. But she added that LPs have been pushing harder for such arrangements.

“Investors are becoming smarter, they are more careful in understanding when the new fund will start investing and making sure they don’t pay management fees during an inactive period,” she said.

One large LP indicated that the ideal arrangement would take things a step further and incorporate a fee structure whereby investors only pay fees on invested rather than committed capital.

For Newbury’s part, when the firm gets around to raising Fund IV, it will change its fundraising strategy, waiting until Fund III is 95 percent committed before it goes back to market. “We should begin the process at the time we are ready to invest that fund,” Lichter said.