03/30/2011

Reservoir Offers Fee Breaks to Key Clients

Pushing to raise $1.5 billion for its latest hedge fund-seeding vehicle, Reservoir Capital has agreed to cut management fees for large investors — a move apparently aimed at quelling complaints about its fee structure.

The New York firm is granting fee concessions to investors that commit at least $200 million to the Reservoir Strategic Partners fund. One beneficiary is New Jersey Investment Council, which pledged $200 million to the vehicle. The $71.6 billion pension system pushed Reservoir to lower the fee it charges on committed capital to 0.75%, from 1.5%. The fee on invested capital was cut to 1%, from 1.5%.

Reservoir has agreed to similar fee breaks for other large investors. Why? Because most other hedge fund seeders assess management fees only on invested capital. Reservoir adheres to a fee structure more typical in the private equity arena, taking a cut of both drawn and undrawn commitments.

The practice has led to complaints from prospective investors, which apparently played a role in Reservoir's decision to lower fees for certain clients. The firm has “been doing seeding forever, and has some of the best successes in the industry,” a competitor said. “All that being said . . . [their] competition is on drawn-down fees.”

The question now is whether the fee discounts Reservoir is granting to blue-chip clients like New Jersey Investment will lead to sniping among smaller investors.

The developments underscore the success big institutional investors have had in wringing concessions from even the most prominent alternative-asset managers in the wake of the financial crisis. In February, New Jersey Investment announced it had won a total of $40 million of fee breaks over five years from hedge fund, private equity and real estate managers.

Reservoir Strategic Partners would seed hedge funds with $150 million to $300 million apiece in exchange for stakes in the management firms. The vehicle would invest across a range of strategies, including distressed debt, event driven and long/short equity.

Reservoir expects to hold a first equity close on May 1, followed by a final close in July or August.

The $4.5 billion firm was founded in 1998 by Daniel Stern, Craig Huff and Gregg Zeitlin, who previously pursued a similar strategy at Ziff Brothers Investments. The team has backed some of the industry's most prominent fund operators, including Gotham Capital, HBK Investments and Och-Ziff Capital. Reservoir's seeding vehicles have generated an average annual return of 14.3%, according to recent marketing documents.

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