The latest research shows that general partners (GPs) are reluctant to compromise with their fund investors, despite the harsh conditions of the last couple of years.
Strategic Capital Management (SCM), a Zurich-based private equity fund manager that has built up data on 1,000 funds and over 700 managers since 1998, found that the level of fees charged by GPs bears no relation to the size of the fund.
The management fee has shown no sign of coming down from its average of 2.5 per cent for venture funds and 1.8 per cent for buyout funds for funds up to $1bn in size. And carried interest has also remained static at 20 per cent.
Funds-of-funds were viewed as an exception, often providing lower fees, rebates for large commitments and flexibility in the combination of management fee and carried interest.
The SCM research shows signs of a buyers’ market emerging, including the more widespread use of hurdle rates – where managers do not receive a share of the profits until a pre-agreed level of return has been achieved – and more clawback agreements where limited partners (LPs) can reclaim disbursements to GPs for profitable investments when later investments in a portfolio make losses.
In addition key man provisions are more commonly offered, meaning that LPs can withdraw from, or wind down, a fund if key employees leave. However, SCM points out that the ‘details and practicalities of implementation are often not clearly defined’.
SCM chief executive Stefan Hepp, the author of the report, concluded: “…While the current tough fundraising environment suggests a buyers’ market for private equity investors, the terms and conditions are still biased towards the manager and thus investors should be careful when reviewing and negotiating agreements as they may not conform to market standards.”
At the launch of its latest E1bn European fund, Hicks, Muse, Tate & Furst was keen to draw attention to LP-friendly terms such as the subordination of carry until all called capital and the preferred return has been handed to investors. But for other funds, it appears to be a different story. Says one leading fund-of-funds investor: “When a large buyout firm has the wind behind it and closes its fund in three months, discussions on fees and other terms may be curtailed.”