Preqin released the results on Monday, June 21, of a May survey of 50 prominent institutional investors in private equity funds, conducted to assess current investor attitudes to fund terms. Preqin noted that private equity fund terms and conditions have drawn considerable attention from institutional investors since the 2009 release of Institutional Limited Partners Association (ILPA)’s Private Equity Principles, which set out a series of preferred terms.
Four-fifths of respondents in the Preqin survey reported seeing a shift in the balance of power toward the investor during negotiations of fund terms and conditions in the past year. Fund managers are already offering investors concessions, evidenced by 41% of investors seeing an improvement in the share of deal-related fees they are set to receive from funds.
Despite concessions from fund managers, the proportion of investors who agreed that general partner-limited partner (LP) interests are properly aligned dropped from 69% in 2009 to 58% in 2010, indicating increased investor dissatisfaction with fund terms.
Seventy-one percent of respondents said they may not invest in a fund as a result of its failure to adhere to ILPA’s Private Equity Principles. Of these, 13% asserted that they definitely would not invest in a fund that did not follow the principles.
Management fees remain a major source of discontent for investors, with 64% of respondents expressing dissatisfaction at the level and structure of management fees charged. More than half of investors felt that the LP-friendlier terms and conditions they are now seeing will continue to be offered over the longer term. Just 9% felt any concessions were only temporary.
In order to see the changes in terms and conditions over the past year, Preqin also analyzed actual fund terms taken from the private placement memorandums (PPMs) of the most recently launched private equity funds. The data show that pressure from LPs is already affecting the terms and conditions being used, the firm said. The analysis included these key findings:
o The mean management fee for new buyout funds (those of a 2010 vintage or yet to hold an initial close) seeking $1 billion or more in commitments is 1.59%, down 32 basis points from its peak for vintage 2008 funds of 1.91%.
o The mean management fee for new real estate funds seeking $1 billion or more in total commitments is 50 basis points below its peak for 2007 vintage funds, now standing at 1.25%.
o The mean management fee for the latest distressed private equity funds seeking $500 million in commitments is 1.82%, down 24 basis points from the average for 208 vintage funds of 2.06%.
“Despite these changes, many investors intend to push for further concessions and 38% anticipate seeking to renegotiate fund terms with their existing fund managers in the coming year,” Helen Kenyon, Preqin’s manager of investor data, said in the statement.
Sam Meakin, managing editor of the 2010 Preqin Fund Terms Advisor, said PPM data show that average management fees have decreased the most for the largest private equity funds, but that fees are significantly lower now than they were at the top of the market across many fund types and sizes. “Other areas of fund agreements are also under scrutiny from investors,” Meakin said. “For example, the mean share of transaction fees rebated to LPs by the latest funds is slightly up from last year and 2008–a trend that may continue in the future.”
Michael S. Fischer ([email protected]) is a New York-based financial writer and editor and a frequent contributor to WealthManagerWeb.com.