Report: Better terms for LPs in 2011

Limited partners will continue to push for more ‘investor-friendly’ terms in 2011 and are expected to receive ‘more favourable treatment’ from managers, according to a new report.

Limited partners in private equity funds are expected to find more “investor-friendly” terms in 2011, including increased sharing of transaction and monitoring fees, and enhanced reporting and transparency, according to a new report.

LPs will continue to seek “better alignment of interests” in what is expected to be an active year for private equity-backed buyouts and secondaries, according to the Neuberger Berman “2011 Outlook: Private Equity.” US leveraged buyout volume in 2010 totaled $79 billion, up from $13 billion in 2009, with secondary volume in 2010 surpassing $20 billion for the first time.

“Against the backdrop of a challenging fundraising environment, we do believe private equity firms and their investors will work together to ensure that investors receive more favourable treatment on terms,” said global head of alternatives at Neuberger Berman, Anthony Tutrone.

“While we do not believe that high quality private equity managers will reduce their typical management fees (of 1.5 percent-2 percent) and 20 percent carried interest above a hurdle rate (typically 8 percent), we do believe that private equity investors wil receive more favourable treatment,” the report said.

Despite the revived debt markets and increase in buyout activity, Neuberger Berman expected transactions to be “prudently leveraged” in 2011.

The report also said 2011 will see a shift away from financial engineering, an increased focus on operational improvements, with more transacations in emerging markets, “primarily Asia and increasingly in South America”.

Large-cap transactions, meanwhile, are expected to start to recover, but transactions in excess of $10 billion will be “rare”, the report said.