Carried interest and hurdle rate structures are becoming more varied, according to research from MJ Hudson.
A growing number of GPs have moved away from the standard 20 percent carry and 8 percent hurdle, the law firm’s Private Equity Fund Terms Report 2018 found. MJ Hudson surveyed private markets funds targeting more than €154 billion of capital in commitments.
The proportion of GPs setting hurdle rates below 8 percent more than doubled to 15.3 percent of those surveyed year-on-year. Funds with hurdle rates below 8 percent accounted for around one-fifth of targeted capital in the survey.
Carried interest rates below 20 percent are also becoming increasingly popular, with 15.3 percent of funds offering these terms, compared with 5.6 percent last year.
“As we are experiencing a fecund fund raising environment, some managers can afford to lower the hurdles without alienating the investors,” Edyta Brozyniak, partner at MJ Hudson, told Private Equity International.
“Of course there is a tension as the investors are happy with the 8 percent hurdle. In order to achieve the 8 percent faster, and thus to accelerate carried interest, some managers resolve to subscription and exit lines taking advantage of low prime rates.”