Blackstone is one of the first private equity firms to end its practice of charging a ‘monitoring fee’ on companies that it takes public. This change was due to pressure from both fund investors and regulators, who have been vying to make the fees and charges of private equity funds more transparent. These ‘monitoring fees’ are essentially consulting agreements where the private equity firm provides advisory and management services to the company and is guaranteed to earn their fees for periods of up to 10 years or longer. If the company is then taken public before the contract has expired, the remaining fees are lumped into an ‘accelerated monitoring fee’, which has cost companies tens of millions of dollars. For example, when Blackstone bought SeaWorld Entertainment in 2009 they charged $5 million a year in monitoring fees, but when it was brought public in 2013 they accelerated these fees into a $46 million accelerated monitoring fee. Removing these fees will be a big hit to Blackstone’s bottom line, as these monitoring fees have generated roughly $270 million in the past 10 years.
These monitoring fees have never flown through to fund investors; meaning Blackstone’s investors didn’t benefit from this additional fee. In order to address this, Blackstone is also changing its fee practice to ensure that all transaction fees in the future will flow through to fund investors as well. This serves to both appease regulators and fund investors; meaning other big private equity firms will likely follow in Blackstone’s footsteps to change their fee practice regarding these monitoring fees.