Fundraising: Carry structures

The last 24 months have seen an increase in innovation from GPs around fund terms. 

Bain Capital offered investors in both its $7.3 billion global buyout fund and its €3.5 billion Europe-focused fund the option of several management fee, carried interest and preferred return hurdle combinations. Advent International, which has just stormed to a close on its $13 billion hard-cap for its eighth flagship vehicle, has scrapped the preferred return hurdle.

The benign fundraising environment has also seen some highly sought-after GPs attempt to make the switch back to a deal-by-deal carry distribution from the European model, in which carry is not distributed until all drawn down capital is repaid to investors and the preferred return is met.

Northern Europe-focused EQT offered investors in its seventh flagship fund a management fee discount if they opted for deal-by-deal carry.

According to a source familiar with the fundraise, the majority of LPs in the €6.75 billion fund, which closed in August, accepted the offer. This represents a return to normality for EQT, which only moved to per-fund carry for its 2011-vintage EQT VI.

Global buyout house Apax Partners, which officially launched its ninth buyout fund targeting $7.5 billion at the beginning of this year, is also offering LPs a choice of carry structure. Approximately $2 billion of that committed capital will be allocated to the deal-by-deal structure and LPs will be offered that option on a first-come, first-served basis.

Managers insist that a deal-by-deal carry waterfall allows the firm to better compensate and retain junior level talent, and some LPs Private Equity International has spoken to say they are not averse to being presented with a choice.

“Investors are highly sophisticated,” Jason Glover, a partner at Simpson Thacher & Bartlett tells PEI.

“They won’t sign up to something unless they think that ultimately it is appropriate.”

If the buoyant fundraising market continues, the industry is likely to see more creativity on fund terms in the months ahead.