Vanilla or chocolate? How do you like your fund terms?

Fundraising data published by PEI this week showed that limited partners continue to flock to private equity, with 130 funds holding final closes on $86.8 billion in the third quarter, up from $74.6 billion in the same quarter last year.

The largest was Bain Capital’s 12th buyout fund, which closed on $9.4 billion, including a hefty 15 percent GP commitment, above its $7 billion target.

The successful fundraising can in part be attributed to the flexible fee structure on offer. As was the case with the firm’s $6.5 billion predecessor fund, Bain Capital Fund XI, limited partners could pick Class A shares and pay a 1.5 percent management fee and 20 percent carried interest, or Class B shares and pay a 0.75 percent management fee and 30 percent carried interest.

Offering flexibility is a smart move; it allows the firm to widen the net of potential investors. “They’re offering things to the market that resonate with more LPs,” says one investor. “Some like vanilla and some like chocolate.”

Having two options on the table also allows the manager to shift the terms in their favour during times of buoyant demand, but save face if they have to tilt back in subsequent funds.

Firms that offer options on fees are in the minority; other examples include Vista Equity Partners, Landmark Partners and Coller Capital. Rumour has it another blue-chip manager in the market is offering a twist on these options, but we’ll bring you more on that when we have confirmation.

So should investors go for vanilla or chocolate? LPs will model scenarios based on the outcome they expect from the manager. Those more sensitive to the J-curve will opt to save on management fee and tilt overall fees towards a greater share of the carry. Public pension plans may choose the structure closest to the two-and-20 market standard, mainly to avoid enquiries from trustees, says one fund formation lawyer.

Bain’s previous fund, Fund XI, was generating a net IRR of 28.4 percent and net multiple of invested capital of 1.44x as of December 2013, according to a memo prepared for the Pennsylvania Public School Employees’ Retirement System. Not bad for a 2014-vintage fund.

The firm declined to comment on the split of commitments between Class A and Class B shares in its latest fund. From the perspective of a GP like Bain, which has an established fund family (and hence is not heavily reliant on fresh fee income to pay the bills or make GP commitments) and backs itself (literally and metaphorically) to generate substantial returns for investors, the chocolate 0.75-and-30 will likely taste best. LPs will have to pick their own flavour.