It's not only the battle to extract lower management fees from fund managers that is exercising the minds of limited partners today. They are also fighting for more control over the way funds are managed.
Recent moves by major supporters of private equity like the California Public Employees' Retirement System and the Oregon Investment Council have related primarily to fees, but many LPs – including Oregon – are looking for other changes as well.
“[LPs] are looking for greater control over the investment programme. Which is to say, they want maybe some tighter investment guidelines or investment restrictions,” says Roger Singer, a partner with law firm Clifford Chance. “They want a tighter key man [provision], and some greater ability that if they find themselves again in a situation like they're in today, they're more likely to have the ability to stop the fund from continuing to call capital”.
Fees remain a major issue among LPs, especially transaction fees which some think should be used to offset the management fee. But other investors see management fees as vital to a fund's prosperity. Lower fees may cut off the lifeline needed to support an organisation and could translate into slashing staff numbers or paying less in compensation.
Because fee discussions can be contentious, GPs may make more concessions on non-economic terms and conditions simply because they are easier to grant, Singer says. “If you change the key man terms, that may or may not ever matter, because, for example, if no key man departed, it doesn't matter what the key man clause says.”
Amid the ongoing bartering, smaller investors may not see as many of the benefits of larger LPs.
“I think on the bigger funds, the bigger investors are getting much better terms. They are able to exert some more leverage, but I don't think that extends all the way down the line,” Singer says.
Mega-funds are less likely to grant concessions to small investors as the difference between raising a $2 billion fund and a $2.5 billion fund, is arguably “not such a big deal”, he explains. For smaller funds, on the other hand, “smaller investors really do matter”.