Compass Diversified Holdings Announces Amendment of its Management Services Agreement

Rhea-AI Summary

Compass Diversified Holdings (NYSE: CODI) has announced a significant amendment to its Management Services Agreement with Compass Group Management , effective January 1, 2025. The new structure introduces a tiered base management fee system and an incentive management fee.

The base management fee will be:

• 2.0% for adjusted net assets up to $3.5 billion
• Initial threshold fee plus 1.25% for assets between $3.5-10 billion
• 1.5% for assets of $10 billion or more

An additional incentive fee of 0.25% applies on assets exceeding $3.5 billion (up to $10 billion), contingent on achieving a three-year annualized internal rate of return above 12% and requires Compensation Committee approval. The amendment also eliminates integration services fees and excludes excess cash from adjusted net assets calculations.

Positive

• Introduction of performance-based incentive fee structure aligns management interests with shareholders
• Reduced management fee rate (1.5%) for assets over $10 billion indicates economies of scale
• 12% minimum return threshold for incentive fees ensures performance accountability

Negative

• Additional 0.25% incentive fee may increase overall management costs for assets between $3.5-10 billion
• Complex fee structure could lead to higher administrative overhead

Insights

Financial Analyst

This restructuring of CODI's management fee agreement introduces significant changes to the company's cost structure. The new tiered system with base management fees of 2.0% for assets up to $3.5 billion, 1.25% for assets between $3.5 billion and $10 billion and 1.5% for assets over $10 billion creates a more nuanced fee structure. Think of it as a progressive tax system for management fees - designed to become more efficient as the company grows.

The introduction of a performance-linked incentive fee of 0.25% with a 12% IRR hurdle rate aligns management interests with shareholders, but only kicks in above the $3.5 billion asset threshold. The elimination of integration services fees and exclusion of excess cash from asset calculations should result in more predictable and potentially lower overall management costs.

For retail investors: This new structure means CODI will likely pay lower fees as it grows larger, while ensuring management is incentivized to deliver strong returns. The 12% performance hurdle is particularly shareholder-friendly, as it means extra fees only get paid when investors are seeing solid returns.

Corporate Governance Expert

The amendment represents a sophisticated evolution in CODI's governance structure. The elimination of integration services fees removes a potential conflict of interest, while the new performance hurdle rate creates stronger accountability. The requirement for Compensation Committee approval of incentive fees adds an important oversight mechanism.

The exclusion of excess cash from adjusted net assets calculation is particularly noteworthy - it prevents management from earning fees on idle capital, encouraging more efficient capital deployment. This alignment of interests between management and shareholders follows best practices in alternative asset management.

In simple terms: The new agreement puts more checks and balances in place, making sure management only gets paid extra when they deliver real value to shareholders. It's like adding both carrots and sticks to ensure everyone's working toward the same goals.

WESTPORT, Conn., Jan. 15, 2025 (GLOBE NEWSWIRE) -- Compass Diversified Holdings (NYSE: CODI), an owner of leading middle market businesses (the “Company” or “CODI”), announced today that on January 15, 2025, it entered into a Seventh Amended and Restated Management Services Agreement with Compass Group Management LLC, the Company’s Manager (the “Amendment”). The Amendment, commencing in the first quarter beginning on January 1, 2025, restructures the management fee under the existing Management Services Agreement to consist of a base management fee and an incentive management fee. Pursuant to the Amendment, the base management fee will be (i) 2.0% of the Company’s adjusted net assets when the adjusted net assets are less than or equal to $3.5 billion (the “Initial Threshold Fee”), (ii) the Initial Threshold Fee, plus 1.25% of the amount of adjusted net assets exceeding $3.5 billion when the adjusted net assets are more than $3.5 billion but less than $10 billion, or (iii) 1.5% of the Company’s adjusted net assets when the adjusted net assets are $10 billion or more.

The incentive management fee will be 0.25% of the amount of adjusted net assets exceeding $3.5 billion, when the adjusted net assets are more than $3.5 billion but less than $10 billion. The incentive management fee is only earned if the Company’s annualized internal rate of return on equity for the trailing three years exceeds 12%. Such incentive management fee is also subject to approval by the Compensation Committee of the Company’s Board of Directors.

The Amendment also eliminates the payment of integration services fee by the Company’s subsidiaries to the Manager and excludes excess cash held by the Company and the Company’s subsidiaries, subject to certain exceptions, from the calculation of adjusted net assets of the Company, along with certain other changes.

The foregoing description of the Amendment is not meant to be exhaustive and is qualified in its entirety by the document itself, a copy of which is attached as an Exhibit to the Form 8-K filed as of the date hereof.

About Compass Diversified

Since its IPO in 2006, CODI has consistently executed its strategy of owning and managing a diverse set of highly defensible, middle-market businesses across the industrial, branded consumer and healthcare sectors. The Company leverages its permanent capital base, long-term disciplined approach, and actionable expertise to maintain controlling ownership interests in each of its subsidiaries, maximizing its ability to impact long-term cash flow generation and value creation. The Company provides both debt and equity capital for its subsidiaries, contributing to their financial and operating flexibility. CODI utilizes the cash flows generated by its subsidiaries to invest in the long-term growth of the Company and has consistently generated strong returns through its culture of transparency, alignment and accountability. For more information, please visit compassdiversified.com.

FORWARD-LOOKING STATEMENTS

This press release contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements with regard to the expectations related to the future performance of CODI. Words such as "believes," "expects," “will,” “anticipates,” “intends,” “continue,” "projects," “potential,” “assuming,” and "future" or similar expressions, are intended to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions, some of which are not currently known to CODI. In addition to factors previously disclosed in CODI’s reports filed with the SEC, the following factors, among others, could cause actual results to differ materially from forward-looking statements: changes in the economy, financial markets and political environment; risks associated with possible disruption in CODI’s operations or the economy generally due to terrorism, natural disasters, or social, civil and political unrest; future changes in laws or regulations (including the interpretation of these laws and regulations by regulatory authorities); and other considerations that may be disclosed from time to time in CODI’s publicly disseminated documents and filings. Further information regarding CODI and factors which could affect the forward-looking statements contained herein can be found in CODI’s annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. Forward-looking statements speak only as of the date they are made. Except as required by law, CODI undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Investor Relations

Compass Diversified
irinquiry@compassdiversified.com

Gateway Group
Cody Slach
949.574.3860
CODI@gateway-grp.com

Media Relations

Compass Diversified
mediainquiry@compassdiversified.com

The IGB Group
Leon Berman
212.477.8438
lberman@igbir.com

FAQ

What are the new management fee rates for CODI as of January 2025?

CODI's new management fee structure includes 2.0% for assets up to $3.5 billion, 1.25% additional for assets between $3.5-10 billion, and 1.5% for assets of $10 billion or more.

What is the incentive fee structure in CODI's 2025 management agreement?

The incentive fee is 0.25% on assets exceeding $3.5 billion (up to $10 billion), requiring a minimum 12% three-year annualized internal rate of return and Compensation Committee approval.

How does CODI's 2025 management agreement affect the calculation of adjusted net assets?

The new agreement excludes excess cash held by CODI and its subsidiaries from the calculation of adjusted net assets, with certain exceptions.

What changes were made to CODI's integration services fees in January 2025?

The amendment eliminates the integration services fees previously paid by CODI's subsidiaries to the Manager.