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ESG-linked private equity compensation key for investors

ESG considerations have a key role to play in private equity investment practice, with 52% of LP fund investors believing GP compensation should be directly linked to ESG goals, a new industry sentiment survey shows.

The report, ‘The Cost of Playing the Game: The Brackendale Private Equity LP Sentiment Survey H1 2023 in Partnership with IQ-EQ’ found that decarbonisation is the most popular target listed by LPs, who underline the importance of having tangible key performance indicators relating to specific strategies and portfolio companies. 

The Brackendale report canvased opinion on private equity compensation levels from leading insurance firms, pension companies, family offices, and fund-of-funds across Europe and the US.

A key struggle facing a significant majority of LP investors is a lack of influence when negotiating fees with GPs, with surveyed investors reporting an average 3.76 out of 10 satisfaction rate. 

While 65% of LPs surveyed deemed the standard 2:20 private equity fee model to be still relevant, the remaining 35% thought that it had become obsolete.  A chief criticism was that the 2% management fee should be paid to fund managers regardless of fund size or performance, with LPs suggesting that fees be tailored to the size and strategy of the fund.  

When asked in which single area LPs would wish to see improvement, 30% of LPs responded that they would prefer to have lower management fees. Another 30% of those surveyed wanted to see an increased capital commitment from GPs, while just under a quarter of respondents would prefer to have better transparency in their communications with their GPs. The remaining respondents named areas like reduced or tiered carry, or lower/fixed fund expenses. 

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