Buffett performance fee calculation

[Graham Osborn]

I am having some difficulty interpreting the following:

 

A division of profits between the Limited Partners and the General Partner, with the first 6% per year going to Limited Partners based upon beginning capital at market, and any excess divided one-fourth to the General Partner and three-fourths to all Limited Partners proportional to their capital.  Any deficiencies in earnings below 6% will be carried forward against future profit allocations to the General Partner, but will not be carried back against amounts previously credited to the General Partner.

 

It seems this describes a high-water mark with a 6% ramp and not a clawback.  Buffett's subsequent criticism of clawback-free formulas casts some doubt on my interpretation however.  Does anyone know?

[gfp]

I don't know for sure, but what I read there describes a hurdle rate with a high water mark and no clawback of previous incentive allocations to the gp.  Which is also what you read from it

[Cigarbutt]

As far as I know, Mr. Buffett never included a clawback provision to his partnerships contracts. The fee structure evolved though with, at first, a guaranteed minimum 4% return which would have theoretically required him to fund the shortfall  (return 0 to 4%) in addition, at some point, to take 25% of the downside.

 

I understand that when he moved to the 6% hurdle rate, it became no longer guaranteed, the downside became no longer shared (again theoretical!) and there was a typical high-water mark before fees above the 6% hurdle become payable again by the limited partners.

 

Possibly incomplete knowledge on my part, but I think that Mr. Buffett has mentioned the potential advantages of clawback provisions for executive pay contracts in order to better align incentives with shareholders and in order to counter corporate greed.

 

Hope that helps.

http://www.scmessinacapital.com/blog/2015/03/what-was-the-fee-structure-of-warren-buffetts-first-investment-partnership-started-in-1956

https://hurricanecapital.wordpress.com/category/buffett-partnership/

[Graham Osborn]

As far as I know, Mr. Buffett never included a clawback provision to his partnerships contracts. The fee structure evolved though with, at first, a guaranteed minimum 4% return which would have theoretically required him to fund the shortfall  (return 0 to 4%) in addition, at some point, to take 25% of the downside.

 

I understand that when he moved to the 6% hurdle rate, it became no longer guaranteed, the downside became no longer shared (again theoretical!) and there was a typical high-water mark before fees above the 6% hurdle become payable again by the limited partners.

 

Possibly incomplete knowledge on my part, but I think that Mr. Buffett has mentioned the potential advantages of clawback provisions for executive pay contracts in order to better align incentives with shareholders and in order to counter corporate greed.

 

Hope that helps.

http://www.scmessinacapital.com/blog/2015/03/what-was-the-fee-structure-of-warren-buffetts-first-investment-partnership-started-in-1956

https://hurricanecapital.wordpress.com/category/buffett-partnership/

 

Very helpful, thank you!  Clawbacks seem to present unique challenges to the hedge fund industry given the presumed liquidity of the structure.  Performance fees are taxed annually, I think even if they are held in an escrow account.  In private equity, clawbacks are usually implemented once upon liquidation of the fund.  It's unclear to me how you would implement annual carry backs without making things very messy.  Buffett admits in his letter that any structure without a clawback can be abused unless the manager has a significant portion of his net worth in the fund - and I think that may be the reason why he transitioned from a carry back to a carry forward when he merged the partnerships.

 

The text reference is on page 15:

 

http://csinvesting.org/wp-content/uploads/2012/05/complete_buffett_partnership_letters-1957-70_in-sections.pdf