Study: India offers sweetest terms

Indian fund managers offer 'preferential fees' for some LPs, according to a study from Squadron Capital.

The majority of general partners offering “preferential” terms and conditions to limited partners are concentrated in India, according to an annual study by Asia-focused fund of funds manager Squadron Capital.

“Preferential” terms in this case means lower management fees or carry, according to the study. Specific details about “preferential” terms were not disclosed.

The country is home to a high proportion of friendly terms, or “sweatheart deals”, for a subset of investors – either due to relationship, commitment size or timing of entry into funds.

Wen Tan, managing director at Squadron, said in a statement: “We do expect the trend towards sweetheart deals to grow, both in this region and globally due to the continuing difficulties that the GP community in general is facing in light of the fundraising environment.”

Squadron surveyed almost 100 Asian private equity funds that were actively fundraising during 2010 and open to investment by international institutional investors.

Although most funds in Asia Pacific do not apply the ILPA Private Equity Principles in their entirety, they are ahead of many funds in the US and Europe in several aspects, such as management fee offsets and distribution waterfalls.

David Pierce

In comparing the major elements of the contractual agreements between an Asian GP and its LPs with the standard practice in the US and Europe as well as the best practice set up by the Institutional Limited Partners Association (ILPA), Squadron found Asian private equity funds’ terms and conditions were still largely falling short of ILPA’s recommended best practice guidelines.

However, “although most funds in Asia Pacific do not apply the ILPA Private Equity Principles in their entirety, they are ahead of many funds in the US and Europe in several aspects, such as management fee offsets and distribution waterfalls, though are behind with respect to the level of management fees applied by the managers of larger funds,” David Pierce, chief executive officer of Squadron, said in the statement.

The findings echoed the results of a similar study conducted by Squadron last year.

According to this year's study, the average fee for a small number of Asian funds with more than $1 billion in assets under management remains at the 2 percent level, contrary to their global counterparts which tend to lower fees to a level that is not too much more than their operating cost because of the large AuM.

“We believe that this is a matter of supply and demand: demand from investors for Asian funds is growing and many institutional investors are more comfortable investing in larger, more established funds. On the supply side, the number of such funds is limited and so their managers are able to continue charging premium fees,” said Pierce.