Preqin: Investor Pressure Leads To Concessions In PE Fund Terms & Conditions - 81% Of Investors See Negotiating Power Move In Their Favor Over Past Year;Significant Drops In Management Fees For Newest Funds

Private equity fund terms and conditions have drawn a lot of attention from institutional investors in the past year following the 2009 release of the ILPA Private Equity Principles, which set out a series of preferred terms. In order to assess current investor attitudes to fund terms, Preqin surveyed 50 prominent institutional investors in private equity funds during May 2010.

Key findings include:

81% of respondents reported seeing a shift in the balance of power towards the investor during negotiations of fund terms andconditions in the past year.

Fund managers are already responding to investor demands for concessions: 41% of investors polled reported seeing animprovement in the share of deal-related fees they are set to receive from funds in the past year.

Despite concessions, the proportion of investors agreeing that GP-LP interests are properly aligned has decreased from 69%in 2009 to 58% in 2010, showing increasing investor dissatisfaction with fund terms.

The majority of respondents (71%) told us they may not invest in a fund as a result of it failing to adhere to ILPA’s PrivateEquity Principles. This included a significant 13% which stated that they definitely would not invest in a fund that did not followthe principles.

Management fees remain a major source of discontent for investors with 64% of respondents expressing dissatisfaction at thelevel and structure of management fees charged.

54% of investors feel that the more LP-friendly terms and conditions they are now seeing will continue to be offered over thelonger term. Just 9% felt any concessions were only temporary.In order to see the actual changes in terms and conditions over the past year, Preqin has analyzed actual fund terms taken from themost recently launched private equity funds. The information can be seen in the newly released 2010 Preqin Fund Terms Advisor. Thedata shows that pressure from LPs is already affecting the terms and conditions being utilized. Key findings of the report include:

The mean management fee for new buyout funds (those of a 2010 vintage or yet to hold an initial close) seeking $1 billion ormore in commitments is 1.59%, down 32 basis points from its peak for vintage 2008 funds of 1.91%.
The mean management fee for new real estate funds seeking $1 billion or more in total commitments is 50 basis points downfrom its peak for 2007 vintage funds, now standing at 1.25%.
The mean management fee for the latest distressed private equity funds seeking less than $500 million in commitments is1.82%, down 24 basis points from the average for 2008 vintage funds of 2.06%.

For more information on the 2010 Preqin Fund Terms Advisor, please visit: www.preqin.com/fta

Comment:

“Private equity fund terms and conditions have increasingly moved into the spotlight in recent months with many investors taking the opportunity to push for more investor-friendly terms in this challenging fundraising environment. The balance of power in negotiations between GPs and LPs is clearly shifting: a considerable 81% of respondents to Preqin’s recent survey felt they were able to wield more influence over negotiations of fund terms and conditions in the past year than they have previously. Indeed, 71% of investors reported seeing changes in prevailing terms in the past year that favored the investor in areas such as management fees and the proportion of deal-related fees rebated to investors. 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. Fund terms and conditions look set to remain an important area of focus for investors in the year ahead and many still feel more can be done in this area to improve the alignment of interests, something GPs should be mindful of when preparing for their next fundraise.”

Helen Kenyon – Manager, Investor Data

Comment:

“Feedback received by Preqin from investors saying they have seen shifts in areas such as management fees is backed up by thechanges seen by Preqin in the latest fund PPMs. The average management fees have decreased the most for the largest privateequity funds, but fees are significantly lower now than they were at the top of the market across many fund types and sizes. Otherareas of fund agreements are also under scrutiny from investors; for example, the mean share of transaction fees rebated to LPs bythe latest funds is slightly up from last year and 2008 – a trend that may continue in the future.”

Sam Meakin – Managing Editor of the 2010 Preqin Fund Terms Advisor