Blackstone president James says co-investment amounts to ‘massive’ fee cut

NEW YORK ― Blackstone Group LP President Tony James said the trend of private equity fund investors making direct investments alongside financial sponsors amounts to a “massive fee cut for the private equity industry.”

James, speaking at the Dow Jones Private Equity Analyst conference in New York, said so-called co-investment by limited partners in private equity funds is “absolutely everywhere now,” noting that many large investors want to have at least a dollar of co-investment for each dollar they invest in a fund.

Because co-investors don’t have private equity fees stripped from their profits, they reap better returns, which puts additional pressure on the private equity funds.

“If it’s primarily a co-invest deal, you can bid a lot more for the company and get lower returns,” James said.

He said the investments have meant that there is more capital chasing the same deals, less pricing discipline in auctions and lower fees for private equity firms.

Many Canadian pension funds and sovereign wealth funds have been active as co-investors in recent years.

In recent months, for instance, private equity firm Apax Partners and two leading Canadian pension funds bid $5 billion for medical device maker Kinetic Concepts Inc.