Given that circumstances have changed in the aftermath of the global financial crisis the industry could see more GPs trying to improve their economics by raising their carried interest up to 25 percent above an additional performance hurdle, for example, or arranging a deal-by-deal carried interest term, said Laurence Zage, partner at placement agent Monument Group.
“We’re seeing the impact of changing supply and demand dynamics: we’ve seen a lot more successful, oversubscribed fundraisings in the last couple of years,” Zage said, adding that this is part of the market cycle. “That clearly changes the negotiation dynamics, particularly for the most in-demand GPs.”
Advent International is currently fundraising for its eighth flagship vehicle, Advent Global Private Equity (GPE) Fund VIII, which is structured without a level of preferred return, or hurdle, that the manager must reach before partners start collecting carried interest. The firm is targeting $12 billion, according to PEI Research & Analytics.
Zage noted that the classic 8 percent hurdle rate was set at a time when the interest rates were much higher than they are now, leading GPs to argue they need to generate outperformance just to reach the hurdle.
Fund administrator Augentius’ managing director Brendan Tyne said, while Advent’s Global Private Equity Fund VIII is “quite an unusual structure,” the fund has protections that offset the lack of preferred return to a certain extent.
The first is the stipulation that the GP cannot collect carry until the fund reaches 125 percent of committed capital, and the other is that LPs pay only 1.5 percent fees on committed capital during the investment period, and another 1.5 percent after the period ends, compared with the usual 2 percent, according to reports.
“Advent is making the assumption that they will be able to return more than 1.25x to their investors,” Tyne said. “It sounds aggressive but it’s something that’s very achievable. As long as it returns over 125 percent, it’ll collect carry from the first dollar.”
Tyne said that Advent is a high-performing fund, which can still draw interest from LPs without hurdle.
At its 13 November meeting, the New Jersey Division of Investment proposed a $100 million maximum investment to the fund, citing Advent’s strong record, diversification in capital allocation and experienced and global team.
The NJ Treasury Department spokesman declined to comment.
The Ohio Police & Fire Pension Fund also committed $50 million to the fund, according to PEI data. The fund had previously committed $35 million to the predecessor, Advent GPE VII.
Other LPs that committed to the predecessor fund include the California Public Employees Retirement System, which invested $450 million, the Canada Pension Plan Investment Board at C$640 million ($550 million; €451.64 million) and the Washington State Investment Board at $400 million, according to PEI data.
Advent’s Fund VII closed on its €8.5 billion hard cap in 2012.