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Preqin Press Release ILPA Principles Adherence

Preqin Press Release ILPA Principles Adherence

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Published by: Dan Primack on Aug 10, 2010
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London: Scotia House, 33 Finsbury Square, London EC2A 1BB Tel: +44 (0)20 7065 5100New York: 230 Park Avenue, 10th floor, New York NY 10169 Tel: +1 212 808 3008Web: www.preqin.com / info@preqin.com
Press Release Immediate Release 9
August 2010
Mixed Results Regarding PE Funds’ Adherence to ILPA Principles
US Firms Resist Change to ‘Whole Fund’ Carry Structure71% of LPs Surveyed Would View Non-Adherence to Principles as a Reason Not to Invest in a Fund
Preqin has assessed how closely recent private equity funds are adhering to a selection of quantifiable ILPA ‘best practices’following the release of ILPA’s Private Equity Principles in September 2009. The analysis was performed using extensive data onfund terms and conditions taken from the 2010 Preqin Fund Terms Advisor publication. (www.preqin.com/fta)ILPA’s Principles call for an “all-contributions-plus-preferred-return-back-first model”. Preqin’s review of the most recent fund PPMsreveals that the vast majority of funds outside of North America do adhere to this Principle, with 88% of European funds with a2009/2010 vintage or still fundraising using a ‘whole fund’ carry structure, and 85% of recent Asia and Rest of World-focused fundsalso doing so. In North America however, only 48% of recent funds use a whole fund structure and 47% are still using a “deal-by-deal” structure.Other ILPA Principles are followed more closely; for example, 97% of recent funds reduce their management fee after theinvestment period through a variety of different methods. ILPA calls for a “significant” step down in fees, and some funds makemore significant reductions than others. For example, 61% of recent buyout funds use the same percentage rate, but apply this onlyto invested capital, while 25% go further, reducing the rate and applying it only to invested capital.
Other Key Facts
In a recent Preqin survey of 50 leading institutional investors, 13% of LPs said they would dismiss an opportunity to investin a fund based solely on its non-adherence to the Principles, and a further 58% said that they would see this as apotential reason to not invest.
ILPA’s Principles state that “all transaction, monitoring, directory, advisory, and exit fees…should accrue 100% to thebenefit of the fund.” There has been considerable movement in recent years towards the GPs rebating to funds the feesthey charge portfolio companies, and 39% of recent funds rebate 100% of these fees. However, most GPs still retain aproportion of such fees, with 28% of GPs rebating 80% of fees to the funds, and 26% of GPs rebating on 50-59%.
The Principles call for no-fault divorce rights upon the vote of two-thirds in interest of LPs. However, less than 4% of fundscomply with this Principle, and the most common LP supermajority required is 80%, the threshold used by 58% of recentfunds.
A substantial contribution by GPs to their own funds is another area detailed in ILPA’s Principles. Two-thirds of recentfunds have GP contributions above 1%, which is seen as the historical standard, demonstrating that this is another areathat has seen movement by GPs.
Please see research report following this release for further details of findings
“Fundraising remains a challenging prospect at present, and the balance of fund terms negotiating power has swung towards LPs.With 130 organizations already endorsing ILPA’s Principles, it is important for private equity firms to be aware of these ‘bestpractices’ and to have considered them when assembling PPMs. While some areas of the Principles are being followed, otherareas do not enjoy such widespread support, with the continued prevalence of deal-by-deal carry structures in the US a notablearea where GPs continue to resist change. The majority of investors in Preqin’s recent survey would see non-adherence to thePrinciples as a reason to not invest in a fund, so it is important that managers with non-‘best practice’ terms are able tocommunicate why this is to an increasingly terms and conditions-sensitive LP community.”
Sam Meakin, Managing Editor of the 2010 Preqin Fund Terms Advisor*Ends*
About Preqin:
Preqin is the leading source of information for the alternative assets industry, providing data and analysis via online databases,publications and bespoke data requests.Preqin has built a reputation in the alternative assets industry for providing the most comprehensive and extensive informationpossible. Leading alternative assets professionals from around the world rely on Preqin’s services daily, and its data and statisticsare regularly quoted by the financial press. For more information, please visit: www.preqin.com
Note to Editors:
Please note that Preqin has completely replaced Private Equity Intelligence as the official company name.
Preqin is spelled without the letter ‘U’ after the ‘Q’.For more information, please contact:Tim Friedman on +44(0)20 7065 5180 or tfriedman@preqin.com
Preqin Special Report:
 Terms and Conditions:Are the ILPA Principles Being Followed?
August 2010
© 2010 Preqin Ltd. / www.preqin.com2
Following extensive discussion, surveying and roundtablemeetings, the Institutional Limited Partners Association (ILPA)released its best practise guide to private equity fund termsand conditions, the Private Equity Principles, in Septemberof 2009. ILPA currently has 130 organizations endorsing thepractices outlined in the document.
The stated aim of the Principles is to ‘serve as a commonframework for continued discussion among and between thegeneral partner and limited partner communities with the goal of improving the private equity industry for the long-term bene
t of allits participants.’Using Preqin’s extensive data on terms and conditions taken fromthe newly released 2010 Preqin Fund Terms Advisor publication, itis possible to assess the level to which new funds are adhering toa selection of quanti
able ILPA ‘best practices’.
Deal by Deal Vs. Whole Fund Carry
A standard all-contributions-plus-preferred-return-back-
rstmodel should be recognized as best practice.
62% of funds closed in 2009, 2010 and currently raisingutilize a whole fund structureAlthough the majority of funds are adhering to a whole fund carrystructure, 38% continue to work on a deal-by-deal basis. WithinEurope, whole fund structures are the norm, with only 7% of recentvehicles focusing on the region using a deal-by-deal structure.Within North America, nearly half of all recent funds are stilldistributing proceeds on a deal by deal basis, as Fig. 1 shows.Similar to European funds, the vast majority of Asia and Rest of World-focused funds have a whole fund structure, with just 11% of recent funds utilizing a deal-by-deal structure.
Management Fees Post-Investment Period
Management fees should step down signi
cantly upon theformation of a follow-on fund and at the end of the investmentperiod.
Only 3% of funds maintain the original management feesupon the completion of the investment period.This is an area where the vast majority of fund managers areadhering to the Principles, although there is a wide range of different methods used for reducing fees, with the savings for LPsvarying considerably. For buyout funds, 99% of funds will reducethe fees, but 61% still charge the same rate applied only to theinvested capital. 25% of buyout funds go further, reducing the rateand applying to invested capital only, as Fig. 2 shows.
Transaction and Monitoring Fees
All transaction, monitoring, directory, advisory, and exit feescharged by the general partner should accrue 100% to the bene
tof the fund.
39% of the most recent funds rebate 100% of such feesback to the fund.
 Terms and Conditions:Are the ILPA Principles Being Followed?
August 2010
47%7%11%48%88%85%5% 5%4%
0%10%20%30%40%50%60%70%80%90%100%NorthAmericaEurope Asia &ROWOther Whole FundDeal-by-Deal
Fig. 1: Basis for Distribution of Fund Proceeds by Primary Geographic Focus of Fund (Funds Raising & Vintage 2009/2010 Funds Closed) 
   P  r  o  p  o  r   t   i  o  n  o   f   F  u  n   d  s
Source Preqin 
Fig. 2: Buyout Funds - Mechanisms for Reducing Management Fee after Investment Period (Funds Raising & Vintage 2009/2010 Funds Closed) 
Source Preqin 

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