The BCE Deal: Talk About Fee Pressure

Remember when that one kid in your class would routinely “blow the bell curve” by scoring so high on an exam that the teacher was forced to recalibrate the bell curve upon which they assigned marks?  Yeah?  Well the world of private equity may be a little miffed that the fee paid to the private equity fund that recently executed the world’s largest LBO wasn’t “2 and 20”, but “0 and 0”.

The deal, of course was the recent acquisition of Bell Canada Enterprises, with an enterprise value of over US$50 billion (7.7x EBITDA), beating KKR’s recent acquisition of TXU by nearly $10 billion (see Bloomberg article, further coverage).  As an end investor, however, the US$100 billion Ontario Teachers’ Pension Plan didn’t charge a management fee or take a carried interest.  Sure, there are likely plenty of consulting fees, break fees, and other advisory fees, but as one astute reader said yesterday:

“This has huge ramifications for the private equity model (and other alternative investment models), especially how it pertains to fees. The whole Teachers’ team probably makes somewhere in the range of $15-20MM (Jim Leech pulled C$3.7MM last year [Ed: annual report page 25]), but these guys get NO carried interest, NO 2% management fees and definitely NO perks (they’re pretty austere at OTPP).”

This reader is right.  Alpha Male has actually pitched private equity deals to these guys and can vouch for the fact that they have pretty pedestrian office space far away from downtown Toronto’s financial core.

As Teachers’ Private Equity head Jim Leech told the media on Tuesday evening that he is not considering a quick flip via IPO, saying:

“…we are not a stereotypical private equity firm.  Our obligation is to pay pensions out over the next 70 years.  And so if we hold a major investment in Bell Canada (BCE) for a long, long time, that’s okay.”

Apparently Leech is just getting rolling.  He says there are a “large number of transactions” in his global pipeline, although “none in Canada”.

Only last week, the International Trade Union Confederation (ITUC) called private equity firms “termites” (see related posting).  But this is is a case where the termite is a fellow pension plan.  So is this a better, more socially-responsible way of doing private equity?  Or as some in the media have suggested, have the Teachers of Ontario simply switched sides?

In any case, their fee structure “blows the curve” for the LBO Class of 2007.

– AM

Late Breaking Addendum: Next week’s Economist mentions the BCE deal in a “special briefing on private equity” (with no reference to the fact that Ontario Teachers isn’t a commercial private equity fund).

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