The New Jersey Division of Investment's State Investment Council (SIC)'s cancellation of its proposed commitment of $100 million to Advent International Global Private Equity (GPE) VIII is the most recent example of the tug of war that can take place between limited partners and fund managers when negotiating fund terms.
NJ SIC approved a $100 million commitment to Advent's latest fund in November, citing the firm's strong track record, including a gross internal rate of return of 35 percent and gross multiple of 3.1x the investments on its total portfolio.
After that meeting, the pension plan's Division of Law and outside counsel began negotiating legal documents governing the investment, but t he investor and manager were “unable to reach agreement on the terms” of the fund, and after several conversations, both sides decided in March to “cease the negotiations,” according to NJ SIC's 25 May meeting material.
Advent GPE VIII launched at the end of 2015, with the firm announcing the fund would have no hurdle rate, the rate managers must reach before partners can start collecting carried interest. The traditional 8 percent hurdle, or preferred return, was set at a time when interest rates were much higher than they are now, leading general partners to argue they need to generate outperformance just to reach the hurdle,as reported by Private Equity International.
But it did offer some limited partner protections in the fund terms, such as the stipulation that the GP cannot collect the 20 percent carried interest until the fund reaches 125 percent of committed capital. It also set the management fees at 1.5 percent, as opposed to the typical 2 percent rate.
The fund raced to its $13 billion hard-cap and held a final close in March after six months in the market, as reported by PEI .
According to NJ SIC's November documents detailing the proposal, Advent GPE VIII was seeking a minimum GP commitment of $360 million, or 3 percent of the $12 billion target. If New Jersey had gone through with its investment, its stake in the fund would have represented 0.83 percent of the total capital raised by Advent.
Advent declined to comment. Requests for comment sent to members of the New Jersey SIC investment team were unanswered.
The previous fund, Advent GPE VII, is a 2012-vintage vehicle that was generating a 25 percent net IRR as of November, the NJ SIC's proposal. NJ SIC was not an investor in this fund, according to PEI Research & Analytics.