MJ Hudson an end-to-end solutions provider to the asset management industry, has published its Private Equity Fund Terms Research – Economics, Alignment and Governance for 2022.
Now in its seventh edition, the research is conducted by MJ Hudson’s Law practice and 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, venture, and growth funds.
Included is an examination of the core economics terms that govern a private fund. It discusses the key terms that impact upon the alignment of interests between LPs and managers such as GP commitment, carried interest rates, and rights to transfer carried interest to third parties.
According to the research, the data trends show a lower haircut on carry in the case of removal for cause.
The most common consequence on carried interest of a GP removal for cause for funds coming to market four years ago was full forfeiture. As of last year, the most common consequence was forfeiture of 25% or less of carried interest. This reflects changes in GP/LP negotiating power, as more money pours into the asset class.
The right to sell carry to third parties is more tightly negotiated. Compared with four years ago, more managers are securing the right to transfer a proportion of carried interest to third parties over the life of a fund, but also fewer funds have come to market with terms that permit such transfers without any sort of limitation.
There is little change in the ‘standard’ 2 and 20 economic formula in the mid-market, but across larger funds we are seeing growth in the number of those paying 1.75% or lower management fees. Mega funds (in excess of 5 billion) typically come to market with a 1.5% management fee, suggesting real pressure on management fees in the market as fund sizes increase.
