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Eight per cent hurdle is under pressure, says MJ Hudson research

There is evidence that the previously sacrosanct 8 per cent hurdle rate may be under challenge, according to the latest edition of MJ Hudson’s Private Equity Fund Terms Research, with 23 per cent of funds this year having (at least initially) dropped the hurdle altogether, an increase on the numbers seen in our 2018 (12 per cent) and 2017 (15 per cent) surveys. 

The 8 per cent hurdle is far from dead, however as it remains the most common rate, with 60 per cent of all funds – and 86 per cent of buyout funds – surveyed this year needing to achieve an 8 per cent return before they get into carry.

During the investment period, more funds are charging a management fee in excess of 2 per cent, which remains the most commonly seen management fee rate, with 47 per cent of funds this year charging a management fee of this level. However, fully 21 per cent of funds this year are charging a management fee in excess of 2 per cent, a substantial increase on the 12 per cent seen in 2018 and 5 per cent in 2017.

A lower proportion of capital is commanding a management fee of 1.5 per cent or less, with 52 per cent of all capital sought/raised by the funds surveyed having headline management fees of 1.5 per cent or less. This compares with 79.5 per cent in MJ Hudson’s 2018 research.

Only 18 per cent of funds surveyed this year offer LPs discounted management fees, compared with 24 per cent in 2018. Commitment size remains the most common method of securing a fee discount when offered, with 64 per cent of funds this year offering a discount linking it to commitment size.

Only 27 per cent of funds managed by US GPs surveyed this year offer fund-as-a-whole waterfall structures. By contrast, European-based GPs overwhelmingly favour fund-as-a-whole structures, with 88 per cent of the funds managed by Europe-based GPs surveyed this year deploying them.

Whilst GP clawback is near universal, only 44 per cent of all funds surveyed this tear have escrow provisions to back clawback in place. It is rarer still in deal-by-deal funds. Despite ILPA’s clear recommendation, only 24 per cent of funds with deal-by-deal waterfalls surveyed this year have any escrow arrangements at all, with a mere 6 per cent withholding the ILPA recommended 30 per cent+ of carry distributions.

Eamon Devlin, Partner of MJ Hudson | Law. says: “Being able to obtain and analyse accurate data on the private equity industry is key. Key, because it helps GPs and LPs make informed decisions. We are pleased to be publishing the latest edition of our private equity terms research and, this year, we have dug even deeper into the data, in order to provide the market with even more detailed analysis and insight. The experience of our law firm working with both GPs and LPs means we bring insight from both sides of the GP/LP equation and, consequently, a 360-degree view on the market”.

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