Trapped on the fee escalator: Will Walton Street Capital stay wedded to its outmoded fee structure with Fund VIII?
Chicago-based private equity real estate manager Walton Street Capital maintained its problematic fee structure through the two and a half years of fundraising for its most recent flagship fund, Walton Street Real Estate Fund VII.
Walton Street’s perseverance came despite calls from limited partners for reform and despite the departure of a large part of the manager’s investor base. Walton Street Capital is one of the few real estate managers that, as of April 2015, still collected an acquisition fee as part of its funds’ fee structure.
Walton Street Capital has utilized leverage as high as 94% for one early Fund VII acquisition (June 2013) and as high as 87%/88% for two more (August and November 2013), generating acquisition fees from 7.8% to as high as 17% of invested equity (at a 1% acquisition fee).
Now, as Walton Street gears up to launch its next major fund, Walton Street Real Estate Fund VIII, the question arises: Will the firm continue using an outmoded fee structure that incentivizes the manager to increase fee income through higher leverage?