Investors push for improved terms on funds
There have been better times to raise a private equity fund. Many firms, even some well-regarded ones, have had to settle for less than they hoped for or postpone their final closings.
Globally, the number of funds raised in the first quarter of this year fell to 106 funds worth a total of $58.9bn (€42.1bn), according to data provider Preqin. This represents a 56% fall by volume and a 64% fall by value from the same period the year before.
The lack of uptake by investors for these funds has led to an even greater danger for firms – limited partners are pushing for improved terms on the funds.
Mark Spinner, head of private equity at law firm Eversheds, said: “At the height of the market many general partners were able more or less to dictate investment terms to the limited partners, particularly those entrants to the private equity asset class that wanted a piece of the action, and as such the mega funds were generating significant levels of management fees which not only covered the operating costs of the general partner but also left some cash over for distribution to the partners.”
It is therefore not surprising that in a poll by Preqin of 50 leading investors 49% said terms and conditions of fund terms have become more important over the past six months.
Michael Russell, head of Europe at gatekeeper Altius Associates, said: “The investor community is more specific and more firm on terms generally, with more engaged negotiation on the fee question than was the case two to five years ago.”
A survey of 170 investors by secondaries specialist Coller Capital found that about four fifths of investors expected the terms and conditions of new buyout funds over the next two years to become more favourable. In the same survey 18 months before, no change had been expected by about two thirds of investors.
The effect of this could be significant. Large buyout firms have already succumbed to pressure to lower management fees from an average of 1.91% of total fund size last year to 1.65%, according to Preqin. The new rate means investors are set to pay $1.2bn less in fees for the $472.8bn of funds closed so far this year or still being raised. It is the lowest management-fee level for large funds, which includes all funds of $1bn or more, since 2004.
However, this figure could be even less as some of the funds may never be raised.
Other terms relating to the management fee are being looked at. A survey by law firm SJ Berwin also found investors were seeking reduced fee levels from firms for the period after funds were fully invested but not fully realised.
In addition, there has been pressure on the treatment of transaction fees, a fee typically paid to general partners by the portfolio company at the time of a transaction, and monitoring fees, a separate fee paid as the general partner manages the portfolio company. Pressure from investors in recent years has meant 80% of these fees have been taken out of the management fee and in the past 12 months this has moved to 100% in some cases.
del.icio.us
Digg
Newsvine
reddit
StumbleUpon