New research published in the 2013 Preqin Private Equity Fund Terms Advisor reveals that pressure in the current private equity fundraising market has led to private equity funds adopting terms and conditions more favorable to investors in an attempt to draw commitments to their funds.
A notable shift has been seen in transaction fee rebates (the proportion of advisory fees private equity firms charge acquired companies which is shared with limited partners). 63% of 2012 and 2013 vintage funds, and those yet to begin investing, now share 100% of such fees with limited partners in the form of management fee rebates – an increase from 51% of 2010 and 2011 vintage funds.
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An increasing proportion of funds are also calculating performance fees (carry) on a whole fund basis, rather than on a deal-by-deal basis, which is a less popular structure among investors.
Key terms and conditions for recent private equity funds include:
In North America, where the deal-by-deal carry structure has historically been most prevalent, 73% of
2012/2013 vintage funds focused on this region now calculate carry on a whole fund basis, compared to 48% in 2010/2011.
Between funds of vintages 2010/2011 and 2012/2013, the proportion of funds using a deal-by-deal structure fell from 46% to 20% for buyout, and from 58% to 20% for real estate.
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By GlobalDataBuyout funds of vintage 2012/2013, or those fundraising that are yet to begin investing, rebate an average of 87% of transaction fees to their investors, compared to an average of 81% for buyout funds of vintage 2010/2011.
The mean management fee for buyout funds now stands at 1.90%, down from 1.94% in 2012.
45% of investors polled by Preqin have seen fund terms and conditions change in favor of LPs over the past 12 months, with 67% now believing that fund terms and conditions are properly aligned between fund managers and investors.
Despite these changes, Preqin’s survey of over 100 investors suggests that areas of contention still exist:
33% of investors interviewed believe that fund manager and investor interests are still not aligned when it comes to the fees and mechanisms involved in private equity fund terms and conditions.
59% of investors interviewed named management fees as an area in which there is still significant room for improvement.
The amount of capital that fund managers commit to their own funds, the GP commitment, was named by 35% of investors interviewed as an area requiring further adjustment in order to improve the alignment of interests between investors and managers.
