MJ Hudson has today published Parts II & III of the latest edition of its Private Equity Fund Terms Research. Now in its sixth edition, the Research provides both LPs and GPs with an enhanced understanding of the current strengths and weaknesses of the fundamental economic, alignment and governance terms impacting private equity fund commitments. It includes comparisons with previously published research and discusses the factors driving change. It relates to buyout funds, venture funds, growth funds, and turnaround funds.
Included in Part II is an examination of how the alignment between investors and fund managers is structured. It discusses the key terms that impact upon the alignment of interests between LPs and managers such as GP commitment, management fee offsets, successor fund restrictions and co-investments. Part III examines governance of private funds and present current trends regarding key investor protections.
Key findings include:
- GPs are committing more to their funds:
More managers are committing capital to their funds, with 40% of funds surveyed containing a GP commitment of 3% of commitments or above. Commitments at the lower end of the range are shrinking too, with only 10% of funds having a GP commitment of less than 2% of commitments, a drop from 35% in our previous publication.
- full transaction fee offset in 9/10 funds:
a full 100% offset is most common, with only 11% of sampled funds not having a 100% offset. Below the headlines are qualifications around the description of fees that are eligible, however.
- co-investments are permitted, but often without restrictions:
94% of the funds allow co-investments in their LPA, but only 45% of the funds that contemplate co-investments require that the co-investment must be on substantially similar terms as the fund’s investment, and 39% require that investment and divestment are at the same time as the fund. In practice, however, other means such as side letters can provide investors with comfort.
- no-fault removal provisions are less prevalent:
47% of the funds in this year’s sample contained a no-fault removal provision, a decrease from 63% of the funds in our previous research. The vast majority of the funds that allow no-fault removal require a qualified majority consent vote of the investors to approve the action. Only 39% of the funds with no-fault removal provisions provide no for compensation for loss of future management fee.
- for cause carry reductions remain shy of 100%:
when the GP is removed for cause, only 28% of funds surveyed specified that full loss of carry would follow. This figure remains broadly unchanged from our previous research.
- change of control provisions remain popular:
77% of funds restrict the principals of the GP to transfer their entitlement to carried interest to third parties without investor (or LPAC) approval.
- 10+2 model sees a slight drop in usage:
there is an increased number of funds specifying an initial term of more than 10 years. Only 34% of funds allow for an extension to the fund’s term at the sole discretion of the GP.
Eamon Devlin, Partner of MJ Hudson | Law said:
“This proprietary research provides detailed analysis on private equity fund terms and the implications for both LPs and GPs. It includes comparisons with prior years’ research and discusses the drivers for any significant changes. As our industry continues to grapple with the disruption caused by COVID, having accurate and insightful data is more important than ever. The experience of our law firm working with both GPs and LPs means MJ Hudson can bring insight from both sides of the GP/LP equation and a consequent 360-degree view on the market”.
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