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Leonard Green changes terms amid fundraise

The Los Angeles-based firm will now share 100% of transaction fees on its sixth fund with LPs, up from 80%. Leonard Green has also strengthened LP clawback provisions and changed the carried interest distribution scheme on the fund.

Leonard Green & Partners, which has been targeting $5 billion for its sixth fund, has changed some terms on the fund, including boosting the amount of transaction fees it will use to offset the management fee paid by limited partners to 100 percent, according to a letter the firm sent to LPs.

Leonard Green outlined the term changes in letters to LPs this week. The changes come as the firm has announced a first closing on about $2 billion for its Green Equity Investors fund, according to the letter and sources in the market. A second close is set for 28 October, the letter said.

The firm originally set the transaction fee offset at 80 percent for Fund VI, an LP source said. General partners generally give ground on LP demands for a more significant fee offset, and most investors ask for at least an 80 percent offset. In this case, Leonard Green made the term changes “in response to the feedback we received from investors”, the firm said in the letter.

Fund VI has also been offering to share 100 percent of any director fees with LPs. Members of the firm collect director fees for sitting on the boards of portfolio companies, an LP who saw fund documents said in a prior interview.

We have always tried to best position the terms of our funds in a manner that allows us to execute our investment strategy as productively as possible while aligning our interests with those of our limited partners.

Leonard Green

Fee offsets were only one of several changes made to the fund. The firm also changed the structure of the carried interest distribution scheme. Now, LPs must be paid back all partnership expenses – except the management fee — before the GP starts to collect profits on the fund. Also, the LP’s ability to “clawback” profits from the GP was strengthened, according to the letter.

Leonard Green also capped the fund at $6 billion, the letter said.

“We have always tried to best position the terms of our funds in a manner that allows us to execute our investment strategy as productively as possible while aligning our interests with those of our limited partners,” the firm said in the letter.

Leonard Green did not return a call for comment.

The firm’s sixth fund will invest between $100 million and $500 million per deal and focus on US retail, consumer products, distribution, media, business services and healthcare. The GP will invest $200 million in the fund over a six year period, according to documents from the School Employees’ Retirement System of Ohio, which committed $50 million. Green also received a $300 million re-up from the Washington State Investment Board.

Green’s previous fund, its largest, raised $5.3 billion in 2007. The fund was generating a 1.3x total value multiple and a net internal rate of return of 20.11 percent, as of 31 March, according to Washington State.

The firm was founded in 1989 by the late Leonard Green. It is led by John Danhaki, Peter Nolan and Jonathan Sokloff, has raised five funds and controls about $9 billion.