- The target company doesn't "agree" to the fees. The PE fund owns the target company outright, so they can manage it however they like. It would be like saying that when you cut the grass on your own lawn (even if you cut it in onerous ways, to stretch the metaphor), the lawn doesn't have to "agree" to be cut. Of course not. You own it, you can do with it as you please.
- You are correct that the victims were the institutional investors (LPs), because the extra fees reduced the profits in the fund (less money was distributed from the portfolio companies to the fund, which the LPs would get, because some of the money was paid in fees directly to the managing PE firm). I say "were" because LPs have absolutely become aware of this problem. This is old news. The article is from 2014. Today, all partnership agreements state that the fee charged to the portfolio companies enter into the fund's waterfall. Problem solved.
- "Do we need to somehow protect institutional investors who manage tens of billions of dollars? Are they a victim that needs protection?" This is a super important point, and something that is often overlooked in PE discussions. It's like all the hand-wringing about the "poor creditors" who lose out when PE deals go bad. Guess what, these "creditors" are investment banks, like Goldman Sachs. However you otherwise feel about GS, there is no reason to ever feel sorry for them.
A few comments:
- The target company doesn't "agree" to the fees. The PE fund owns the target company outright, so they can manage it however they like. It would be like saying that when you cut the grass on your own lawn (even if you cut it in onerous ways, to stretch the metaphor), the lawn doesn't have to "agree" to be cut. Of course not. You own it, you can do with it as you please.
- You are correct that the victims were the institutional investors (LPs), because the extra fees reduced the profits in the fund (less money was distributed from the portfolio companies to the fund, which the LPs would get, because some of the money was paid in fees directly to the managing PE firm). I say "were" because LPs have absolutely become aware of this problem. This is old news. The article is from 2014. Today, all partnership agreements state that the fee charged to the portfolio companies enter into the fund's waterfall. Problem solved.
- "Do we need to somehow protect institutional investors who manage tens of billions of dollars? Are they a victim that needs protection?" This is a super important point, and something that is often overlooked in PE discussions. It's like all the hand-wringing about the "poor creditors" who lose out when PE deals go bad. Guess what, these "creditors" are investment banks, like Goldman Sachs. However you otherwise feel about GS, there is no reason to ever feel sorry for them.
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