What is actually meant by the term monitoring fee?
The term monitoring fee actually refers to a recurring fee which a private equity business can charge with the intention of increasing its overall income.
By the term Monitoring Fee, we actually refer to any fee which is charged to an investor by any private equity business out there for the advisory service which is being provided to them. It can be of 2 types. The first type is that it can be a fixed sum every year and secondly, one can also calculate it as a percentage of either profit or revenue. When it comes to percentages, there is a minimum sum on most occasions which have to be paid by a client irrespective of whether it is revenue or a profit. At present, you will come across a number of equity firms out there which make a sort of contract with their customers with the intention of collecting the monitoring fee every single year and this will go on for a specific number of years, and the number can be 10 or 20, for example. As a matter of fact, both individual, as well as institutional customers of the private equity firm, are required to pay this fee in the long run.
On one hand, one can charge it to any investor for the purpose of handling as well as monitoring his or her investment. On the other hand, for corporate businesses, this monitoring fee is going to be charged whenever any investment company will be involved in any takeover or any other activity based on deals. Another thing that ought to be mentioned here is the fact that there isn’t any fixed cap on exactly how much can be charged by an equity company from its customers despite the fact that this will vary to a great extent from 1 percent to as much as 3 percent.
Moreover, the company is going to charge the monitoring fee which will depend on the MSA (which is the short form of Management Services Agreement) that has been entered into by the company as well as its customers. This particular agreement will be valid for as many as 10 or 20 years and this is going to depend on the terms and conditions which have been agreed to by both the parties out there. The majority of the MSAs likewise come with a particular provision which is known as estimated payment under which it is imperative for the customers to pay off the monitoring fees for the whole period of time agreed even though the private equity company is sold or in case the holdings of the customer are sold before the term has come to an end.
Lastly, it is possible for monitoring fees to average somewhere between 3 to 5% of EBITDA.