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Press Release – Immediate Release 9
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*
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