What’s new in private equity fund deal terms

There may be nothing new under the sun but there are a number of new wrinkles cropping up in the private equity fund universe, says Joseph Bartlett.

Herewith are a few noteworthy items from a fund term sheet I have recently been reviewing.

In the 'it's about time' department, the general partner/sponsor of a particular fund has offered to spread the management fee over the assets of the instant fund plus the successor fund if one is organised with commitments equal to or exceeding the commitments commanded by the instant fund. The idea is that, if no successor fund is organised, the management fee is calculated as a percentage of the capital commitments of the current fund; if, however, a large successor fund is organised, then the management fee is calculated as a percentage of the investments of the current fund and the successor fund, measured at cost and net of write offs and distributions. This is a clear concession to LPs, who are claiming that the management fees measured by commitments, once several funds are concurrently in existence, are well in excess of what the general partners should in the aggregate be charging.

A second interesting provision has to do with the management fee offset. One recent offset provision is 100 percent for fees charged to the portfolio companies except, and this is the interesting point, the fees paid to the 'venture partner' of the GP. 'Venture partner' is a term now currently used for that individual who used to be called the 'entrepreneur-in-residence '… an individual with operating experience who is expected not so much to screen and decide on investment and harvesting strategy as to pitch in as a pro-active board member in the execution phase of the overall investment strategy.

The organisational expenses in one case I ran across are capped at $500,000 (a typical number) but with an exception that 'with advisory board approval' the expenses can go up to $750,000. This means that, as I read it, the law firm will have at least an opportunity to plead its case for more money, instead of swallowing excess time charges and disbursements which may have been incurred because the fund took so much longer than expected to get organised.

Next, and this is one we have seen before, if assets are distributed in kind, the general partner has the right to pay up as if it were a limited partner and receive 20 per cent of the entire bloc of securities being distributed, rather than those worth 20 per cent of the deemed appreciation. This is a 'buy-in' provision; the GP contributes to the fund an amount which would make it, nunc pro tunc, a 20 per cent contributor of the cost basis of the investment involved, that amount to be distributed back to the LPs. Obviously, this is an advantage to the GP if we are talking about an appreciated position.