Preqin Special Report: Private Capital Fund Terms

PREQIN SPECIAL REPORT: PRIVATE CAPITAL FUND TERMS

OCTOBER 2017

alternative assets. intelligent data. PREQIN SPECIAL REPORT: PRIVATE CAPITAL FUND TERMS KEY FACTS

PREQIN HAS THE MOST COMPREHENSIVE DATASET THE 2/20 FEE MODEL OF PRIVATE CAPITAL FUND TERMS 7,500+ 44% Number of private capital funds with actual fund terms and of recent direct conditions data recorded by Preqin. private capital funds charge a management fee of 3,300+ 2.00%. Number of anonymous fund listings with actual terms and conditions data. 82% of recent direct 1,700+ private capital funds Number of named funds in the 2017 Preqin Private Capital Fund have a carried interest Terms Advisor. rate of 20%.

ALIGNMENT OF INTERESTS AND THE POWER OF THE LP

Management fees 63% should cover costs of investors surveyed in December 2016 believe that GP and LP only with no profit. interests are properly aligned. Performance should be based on properly calculated alpha generated 91% - North America-based family office, of LPs have decided against investing in a fund due to the proposed H1 2017 terms and conditions.

p3 Foreword p4 Data Sources p5 LP Attitudes towards Fund Terms p7 Management Fees p9 Performance Fees p11 Governance p12 Fund Formation and Costs p13 Fund Terms Online p14 Net Cost Listings

All rights reserved. The entire contents of Preqin Special Report: Private Capital Fund Terms, October 2017 are the Copyright of Preqin Ltd. No part of this publication or any information contained in it may be copied, transmitted by any electronic means, or stored in any electronic or other data storage medium, or printed or published in any document, report or publication, without the express prior written approval of Preqin Ltd. The information presented in Preqin Special Report: Private Capital Fund Terms, October 2017 is for information purposes only and does not constitute and should not be construed as a solicitation or other offer, or recommendation to acquire or dispose of any investment or to engage in any other transaction, or as advice of any nature whatsoever. If the reader seeks advice rather than information then he should seek an independent financial advisor and hereby agrees that he will not hold Preqin Ltd. responsible in law or equity for any decisions of whatever nature the reader makes or refrains from making following its use of Preqin Special Report: Private Capital Fund Terms, October 2017. While reasonable efforts have been made to obtain information from sources that are believed to be accurate, and to confirm the accuracy of such information wherever possible, Preqin Ltd. does not make any representation or warranty that the information or opinions contained in Preqin Special Report: Private Capital Fund Terms, October 2017 are accurate, reliable, up-to-date or complete. Although every reasonable effort has been made to ensure the accuracy of this publication Preqin Ltd. does not accept any responsibility for any errors or omissions within Preqin Special Report: Private Capital Fund Terms, October 2017 or for any expense or other loss alleged to have arisen in any way with a reader’s use of this publication.

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or GPs, finding the right balance and adopting the most appropriate fund terms and conditions is no easy task. It is well known Fthat the opaque and confidential nature of private capital investment means that fees are rarely disclosed outside the fund, and as such, it is difficult to benchmark against other GPs and competitors throughout the industry. Nevertheless, 2016 saw greater movement towards improvements in transparency throughout the private capital industry, particularly as high-profile cases regarding how fees were charged to investors were brought forward by the SEC. Furthermore, new legislation in California requires the additional disclosure of fees from alternative managers to public bodies. Some firms in the industry have also become more innovative in the competitive fundraising environment and have offered bespoke fund structures to provide a more unique approach to fund terms and conditions, while simultaneously aligning their interests with those of their investors.

The data and analysis contained in this report draws upon the 2017 Preqin Private Capital Fund Terms Advisor. The full-length 318- page book offers the most comprehensive data and intelligence on fund terms and conditions in the industry and aims to reveal the latest trends and current market sentiment that surrounds this opaque area. The eleventh edition in the series, the full-length Fund Terms Advisor uses fund terms for over 7,500 private capital funds and compiles data from our current databases, historical datasets and LP and GP surveys to provide comprehensive and accurate insight into the private capital fund terms universe.

Uses include: ■■ Individual fund listings, on an anonymous basis, for more than 3,300 funds of different private capital strategies, vintages, geographies and sizes; ■■ A complimentary 12-month subscription to our online service, to calculate your own benchmarks for fund terms and conditions by strategy, geographic focus, fund size and minimum LP commitment; ■■ Listings of nearly 1,700 named funds showing the net costs incurred by investors annually (obtained through Freedom of Information requests to public pension funds in the US and UK); ■■ Coverage of fund managers offering separate accounts and co-investment rights; ■■ Listings of law firms active in fund formation, including sample assignments; ■■ Plus much more.

We hope that you find this report informative and valuable. For more information, or to order your copy of the full Fund Terms Advisor publication, please visit www.preqin.com/fta.

To find out how Preqin’s services can help your business in 2017 and beyond, please do not hesitate to contact us [email protected] or at our New York, London, Singapore, San Francisco or Hong Kong offices.

alternative assets. intelligent data. PREQIN SPECIAL REPORT: PRIVATE CAPITAL FUND TERMS DATA SOURCES

he 2017 Preqin Private Capital Fund This detailed information was provided to 3. FUND PERFORMANCE BENCHMARKS TTerms Advisor incorporates all data us in confidence, on the understanding Preqin’s Private Equity Online has the concerning private capital, which includes that it would be used for the purposes of largest sample of private equity (including private equity, private debt, private establishing benchmarks and trends, but real estate and infrastructure) fund equity real estate, unlisted infrastructure that the individual details of each fund’s performance data available anywhere and natural resources. The book delivers terms would not be disclosed on a named (currently over 8,700 funds), and is the same high-quality information and basis, and neither would the identity of unique in that this data is available on a intelligence across the private equity the funds taking part in the data collection completely transparent basis: details can industry and beyond. The 2017 Private process. We are very grateful to the many be seen for each individual named fund Capital Fund Terms Advisor draws upon GPs and placement agents that have on the database. We have used Private three main sources of data: shared information with us in this way. Equity Online to model the typical investment and divestment progress of 1. FUND TERMS DOCUMENTATION 2. FREEDOM OF INFORMATION ACT each fund type over its lifetime, and have Preqin has access to fund terms (FOIA) INFORMATION ON FEES AND therefore modelled the economic impact documentation for over 7,500 separate COSTS of different sets of terms. private capital funds of all types, sizes and Freedom of Information Act (FOIA) geographic foci. Anonymous listings are information has been used to provide available for more than 3,300 funds on our the net effect of the partnership terms Fund Terms Online module in the actual fees and costs incurred by (www.preqin.com/fta). Furthermore, the LP. In other words, instead of giving accredited investors signed-up to our a complex set of rules for how fees are to complimentary Preqin Investor Network be calculated, and the way in which other (PIN) service can access fund terms costs are to be credited against fees, the benchmarks and fund-specific fund terms FOIA data gives a simple financial statistic: data supplied directly by fund managers the total net fees incurred over the period. and placement agents.

THE 2017 PREQIN PRIVATE CAPITAL FUND TERMS ADVISOR

The 2017 Preqin Private Capital Fund Terms Advisor is the ultimate guide to private capital fund terms and conditions, drawing upon extensive research and containing analysis, benchmarks, listings of funds and their terms (on an anonymous basis), investor opinions and more. THE 2017 PREQIN PRIVATE CAPITAL FUND TERMS This year’s edition of the Fund Terms Advisor draws upon analysis of fund terms and ADVISOR conditions data for over 7,500 funds, more than ever before, including private equity,

venture capital, real estate, infrastructure, private debt and natural resources funds. alternative assets. intelligent data.

The 2017 publication is accompanied by a complimentary 12-month subscription to our online service, which you can use to calculate your own benchmarks for fund terms and conditions by strategy, geographic focus, fund size and by minimum LP commitment.

For more information, to download sample pages or to order your copy, please visit:

www.preqin.com/fta

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ALIGNMENT OF INTERESTS Fig. 1: Extent to Which LPs Believe that GP and LP Interests Are Properly Aligned, The alignment of interests between GPs 2013 - 2016 and LPs is an important aspect of their 100% 4% 4% 6% relationship, and is intrinsically related to 10% 90% fund terms and conditions. According to Preqin’s LP survey conducted in December 80% Strongly Agree 2016 across the private capital universe, 70% a significant 63% of investors believe that 63% 59% 57% 60% 60% Agree GP and LP interests are properly aligned. Although a majority of LPs have agreed 50% Disagree that interests are aligned since 2013, this 40% is a reduction of seven percentage points 30% Strongly Disagree from the previous year (Fig. 1). Proportion of Respondents Proportion 27% 20% 32% 27% 35% The proportion (37%) of investors that do 10% not believe that interests between LPs and 10% 1% 4% 2% GPs are properly aligned has increased by 0% Jun-13 Jun-14 Jun-15 Dec-16 six percentage points from June 2015. This Source: 2017 Preqin Private Capital Fund Terms Advisor shows that although GP and LP interests are largely aligned, there is a small but not insignificant proportion of LPs dissatisfied are how performance fees are charged have occasionally been deterred from with the alignment of interests between (58%), fund-level transparency (52%) and making an investment on this basis. GPs and LPs. the amount of performance fees charged (48%). OUTLOOK The majority (67%) of LPs in private In a competitive fundraising environment, capital believe management fees IMPACT ON INVESTMENT DECISIONS it is imperative that GPs show their form an area where alignment with Fund terms and conditions proposed by commitment to improving the alignment GPs can be improved (Fig. 2), with one GPs have a heavy bearing on whether of GP and LP interests, and fund managers respondent stating that “management an LP decides to invest in a fund, as are increasingly recognizing the fees should cover costs only with no profit. demonstrated by Fig. 3. Twenty-six percent significance of LP power in the terms and Performance should be based on properly of LPs have frequently decided not to conditions space. calculated alpha generated”. Other areas in invest in a fund as a result of the proposed which LPs want GPs to address key issues terms and conditions, while a further 65%

Fig. 2: Areas in Which LPs Believe the Alignment of GP and LP Fig. 3: Frequency with Which LPs Have Decided Not to Invest in Interests Can Be Improved a Fund Due to the Proposed Terms and Conditions

Management Fees 67% Performance Fees - 58% 9% How They Are Charged Increased Transparency 52% 26% Frequently Decided at Fund Level Not to Invest Performance Fees - 48% Amount Occasionally Decided Hurdle Rate 47% Not to Invest

GP Commitment to Fund 42% Never Decided Not to Invest Lock-up Period 14%

Other 3% 65%

0% 20% 40% 60% 80% Proportion of Respondents Source: 2017 Preqin Private Capital Fund Terms Advisor Source: 2017 Preqin Private Capital Fund Terms Advisor

alternative assets. intelligent data. 2017 PREQIN PRIVATE CAPITAL FUNDS TERMS ADVISOR

The 2017 Preqin Private Capital Fund Terms Advisor is the ultimate guide to private capital fund terms and conditions. This year’s publication covers private equity, venture capital, real estate, infrastructure, private debt and natural resources, featuring analysis based on over 7,500 funds – more than ever before!

• Identify typical terms and benchmark funds to see how terms compare to the market • View actual terms and conditions data for over 3,300 funds • Download data to conduct your own analysis • Model the real economic impact of various terms • Review data and analysis on the actual fees and costs incurred by LPs

Every purchased copy of the 2017 Preqin Private Capital Fund Terms Advisor includes a free 12-month subscription to Preqin’s Fund Terms Advisor online service.

For more information, please visit: www.preqin.com/fta

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INVESTMENT PERIOD Fig. 4: Average Duration of Investment Period by Fund Type (Funds Raising & Vintage Management fees during the investment 2016/2017 Funds Closed) period are predominantly calculated 6 5.5 5.5 5.2 as a percentage fee applied to the 5.0 5.0 5.0 5.0 5 4.9 4.7 commitments made by an LP to the 4.5 4.3 4.3 4.3 4.0 4.0 4.0 4.0 investment vehicle. The reasoning 4 3.7 3.7 3.3 3.3 Mean behind this is that the principal aspect 3.0 3.0 3.0 of the workload of a GP is the search for 3 (Years) investments, and this is driven by the size 2 Median of total commitments to the fund rather 1 than the amount invested at this stage Length Period Investment of the fund’s lifetime. Fund managers 0 typically state the investment period as the number of years from either the first Buyout Growth Debt Natural

or final close of the fund. Many GPs elect Resources Distressed Mezzanine Real Estate Real Turnaround Secondaries

to alter the management fee once the Infrastructure Private Equity Private Equity Fund of Funds Direct Lending predetermined investment period is over, Venture Capital and therefore the length of the investment Fund Type period is a key consideration for LPs Source: 2017 Preqin Private Capital Fund Terms Advisor preparing to commit capital. MANAGEMENT FEE DURING managers of the underlying fund interest. As seen in Fig. 4, turnaround funds have INVESTMENT PERIOD Additionally, finding and managing direct the longest mean investment period (5.5 The average management fee remains investments is significantly more complex years) of all private capital strategies. In around the traditional figure of 2.00% and expensive than investing in funds and contrast, real estate and direct lending across private capital strategies (for can explain the lower management fee funds have the shortest mean investment funds raising as at May 2017 or with a rate. Furthermore, for secondaries funds, periods (3.3 years). The mean investment 2016/2017 vintage), with the exception secondary fund interests are typically period for recent private equity of private equity funds of funds and acquired following the underlying funds’ secondaries funds has decreased from 5.0 private equity secondaries funds, which investment period, at which point many years at the time of Preqin’s 2016 study to have a mean management fee of 0.89% funds begin a reduction mechanism of 3.7 years, which could reflect expanded and 0.95%, respectively (Fig. 5). Lower some kind. Turnaround (2.13%), mezzanine deal flow for secondaries managers and management fees are generally expected (2.05%) and venture capital (2.01%) are the shorter amount of time taken to among multi-manager funds due to the only strategies that average above a deploy capital. the dual layer of fees charged by the 2.00% fee.

Fig. 5: Average Management Fee during Investment Period by Fig. 6: Buyout Funds - Average Management Fee by Fund Size Fund Type (Funds Raising & Vintage 2016/2017 Funds Closed) (Funds Raising & Vintage 2016/2017 Funds Closed) 2.5% 2.5%

2.00% 2.00% 2.00% 2.0% 1.97% 1.98% 1.98% 2.0% 1.83% Mean 1.75% 1.65% 1.5% 1.50% 1.5% Mean Median 1.0% Median 1.0% 0.5%

0.0% 0.5% Investment Period Management Fee Period Investment Investment Period Management Fee Period Investment Buyout

Growth 0.0% Mezzanine Real Estate Real Turnaround Infrastructure $250- $500- Direct Lending Direct $2bn PE Secondaries 499mn 999mn Venture Capital Distressed Debt or More PE Fund of Funds PE Fund $250mn $1-1.9bn Natural Resources Less than Less Fund Type Fund Size Source: 2017 Preqin Private Capital Fund Terms Advisor Source: 2017 Preqin Private Capital Fund Terms Advisor

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BUYOUT Fig. 7: Buyout Funds - Mean Management Fee by Fund Size and Vintage Year The size of a buyout vehicle does not 2.2% have a major impact on the typical management fee charged by GPs, with 2.0% the exception of the largest funds, as shown in Fig. 6. The median management 1.8% Less than $500mn fees for smaller buyout funds (less than $1bn) is 2.00%, whereas the median 1.6% $500-999mn management fees for buyout funds of $1-1.9bn in size and $2bn or larger are 1.4% $1bn or More 1.75% and 1.50% respectively. In the case of larger funds, management fees may be 1.2% significantly reduced due to the absolute Management Fee Period Investment 1.0% amount that GPs can make from LPs in

management fees alone, regardless of 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017/ fund performance, potentially harming Raising the alignment of interests between GPs Vintage Year and LPs. Source: 2017 Preqin Private Capital Fund Terms Advisor

The largest VENTURE CAPITAL instead of relying on performance-related Fig. 8 shows the breakdown of venture income which could never materialize. buyout funds capital funds in market as at May 2017 ($1bn or more) have or with a 2016/2017 vintage by average REAL ESTATE continually charged management fee charged. Twenty-one Looking at management fees for real lower management percent of venture capital funds charge a estate funds by fund size and vintage year fees than their smaller management fee lower than the industry simultaneously, we can see that mid- to counterparts standard of 2.00%. The majority (51%) of large-sized firms ($500-999mn) have these funds charge between 2.00% and increased their management fees over 2.49%. A notable proportion (28%) charge recent years, following a low of 1.25% for Fig. 7 shows a breakdown of mean significantly higher management fees of vintage 2012 real estate funds (Fig. 9). management fees for buyout vehicles 2.50% or more. Small funds (less than $500mn) have seen by both vintage year and fund size. The less variation, oscillating between 1.40% largest buyout funds ($1bn or more) have Venture capital funds tend to have higher and 1.60%. The largest funds ($1bn or continually charged lower management management fees than buyout or growth more) have historically charged the lowest fees than their smaller counterparts. funds due to the riskier nature of their management fee over the past decade, investments, with GPs shifting towards with vintage 2014 funds charging the guaranteed compensation from these fees lowest at 1.11%.

Fig. 8: Venture Capital Funds - Management Fee during Investment Period (Funds Raising & Vintage 2016/2017 Funds Fig. 9: Real Estate Funds - Mean Management Fee by Fund Size Closed) and Vintage Year 60% 1.8% 1.7% 50% 49% 1.6% 40% 1.5% Less than 1.4% $500mn 30% 1.3% $500-999mn 23% 1.2% 20% $1bn or More

Proportion of Funds Proportion 13% 1.1% 10% 6% 5% 1.0% 2% 2% 0% 0.9% 0% Management Fee Period Investment 0.8% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2.75% 1.25% or More Less than Less 1.25-1.49% 1.50-1.74% 1.75-1.99% 2.00-2.24% 2.25-2.49% 2.50-2.74%

Investment Period Management Fee Vintage Year 2017/Raising Source: 2017 Preqin Private Capital Fund Terms Advisor Source: 2017 Preqin Private Capital Fund Terms Advisor

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BASIS FOR DISTRIBUTION OF FUND Fig. 10: Basis for Distribution of Fund Proceeds by Fund Type (Funds Raising & Vintage PROCEEDS 2016/2017 Funds Closed) GPs managing private capital funds 100% 2% 4% 4% 2% 17% may expect to earn a share of the net 90% 20% 80% 40% 40% Other investment gains from their funds through 70% 70% carried interest or simply ‘carry’. Once the 60% 80% 50% 81% 88% 89% 84% 91% fund exceeds its preferred return/hurdle 50% 100% 20% 100% 60% Whole Fund 40% rate (where applicable), the carry fee 30% 60% Deal-by-Deal paid to the GP can be structured in two 20% 40% Proportion of Funds Proportion 30% 33% 10% principal ways: on a “whole fund” basis or 18% 15% 11% 14% 20% 0% 9% 9% on a “deal-by-deal basis”. Buyout Fig. 10 shows the proportion of each fund Growth Mezzanine Real Estate Real

type that makes distributions to LPs on Turnaround Infrastructure a whole fund, deal-by-deal or alternative Direct Lending Venture Capital Distressed Debt Distressed PE Fund of Funds Natural Resources

basis (for funds raising as at May 2017 Other Private Debt or with a 2016/2017 vintage). Charging Other Private Equity carried interest on the whole fund is the Fund Type Source: 2017 Preqin Private Capital Fund Terms Advisor most common method for most private capital fund types shown. Over 80% of manager; it acts as an incentive for GPs HURDLE RATE (PREFERRED RETURN) buyout, growth, infrastructure, real estate to generate profits and serves to help to Hurdle rates refer to the minimum rate of and venture capital funds each use this align GP and LP interests. The fee should return a GP has to meet before receiving structure, whereas a smaller proportion serve as the primary source of income carry on profits, helping to better align (60%) of natural resources funds do the for the GP and differs from management GP/LP interests and ensuring that the GPs same. The deal-by-deal method is most fees, which should only cover the cost are being appropriately compensated for widely used by direct lending (60%), of running the fund. The carried interest a fund’s strong performance. As shown distressed debt (40%) and mezzanine rate of 20% is considered the industry in Fig. 12, the largest proportion (52%) (33%) funds. Across all recent private standard, and is charged by 82% of funds of direct private capital funds (excluding capital funds, 81% elect to charge carried in market as at May 2017 or funds closed fund of funds and secondaries funds) have interest on a whole fund basis. with a 2016/2017 vintage (Fig. 11). Only a hurdle rate of 8%. Notably, only 11% do a combined 12% charge less than the not have a hurdle rate for their vehicles, CARRIED INTEREST industry standard and an even smaller meaning that GPs can earn carry as soon Carried interest is the proportion of proportion (6%) charge more than 20%. as investments are in the black and have a fund’s profits received by the fund been distributed to LPs.

Fig. 11: Carried Interest Rate Used by Direct Private Capital Fig. 12: Hurdle Rate Used by Direct Private Capital Funds (Funds Funds (Funds Raising & Vintage 2016/2017 Funds Closed) Raising & Vintage 2016/2017 Funds Closed) 90% 60% 82% 80% 52% 50% 70% 60% 40% 50% 30% 40% 20% 30% Proportion of Funds Proportion Proportion of Funds Proportion 11% 20% 10% 7% 8% 8% 4% 6% 4% 10% 6% 6% 3% 3% 0% 0% 0% 1-5% 6% 7% 8% 9% 10% More Less than 10% 10% 11-19% 20% More than than 20% 10% Carried Interest Rate Hurdle Rate Source: 2017 Preqin Private Capital Fund Terms Advisor Source: 2017 Preqin Private Capital Fund Terms Advisor

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his section focuses on some of Fig. 13: Number of Levels in Key-Man Clause by Fund Size (Funds Raising & Vintage Tthe non-financial aspects that are 2016/2017 Funds Closed) important considerations in the alignment 100% 4% of interests between LPs and GPs and 90% 13% 27% during the due diligence process. 80% 31% 32% 50% 70% 3 Levels KEY-MAN CLAUSE 60% The implementation of a key-man clause 50% 100% 100% 2 Levels 40% 87% is now commonplace across most direct 73% 30% 65% 68% private capital fund types. Preqin data 50% 1 Level Proportion of Funds Proportion shows that 83% of recent direct private 20% capital funds (funds raising as at May 10% 0% 2017 or with a 2016 or 2017 vintage) have a key-man clause. The majority of $2bn

key-man clauses specify the number of or More $50mn $1-1.9bn Less than partners at the firm, often naming specific $50-99mn individuals that would need to limit their $100-249mn $250-499mn $500-999mn time devoted to the partnership for the Fund Size Source: 2017 Preqin Private Capital Fund Terms Advisor clause to be activated. Some LPs even state specific quantitative terms, such as a demand that “75% of their business time” Fig. 14: LP Supermajority Required for No-Fault Divorce Clause (Funds Raising & is dedicated to the fund or related entities. Vintage 2016/2017 Funds Closed) 60% 55% Fig. 13 shows a general trend emerging, whereby larger funds tend to have more 50% than one level in the key-man clause, primarily due to the fact that, where there 40% are more key contacts at a GP working on the fund, the fund tends to be bigger. 30% Sixty-seven percent of funds of $1bn or more in size that have a key-man clause 20% have three levels in the clause, compared of Funds Proportion 14% to smaller funds for which one-level 10% 10% 6% clauses are most prominent: all funds 4% 4% 4% 2% 2% under $50mn that have a clause use a 0% one-level key-man clause. A notable 4% 50% 60% 67% 70% 75% 80% 85% 90% 100% of small to mid-sized funds ($100-249mn) have three levels in their key-man clause. LP Supermajority Required Source: 2017 Preqin Private Capital Fund Terms Advisor

NO-FAULT DIVORCE CLAUSE Private capital funds have provisions for Fig. 14 shows the LP supermajority terminating the investment period and/ required by funds raising as at May 2017 or appointing a new manager without any or closed with a 2016 or 2017 vintage. specific trigger relating to fund manager As seen in previous years, the most behaviour. These terms are customary for commonly sought term is a supermajority private capital funds, the most common requirement of 75%, as required by 55% of which is a no-fault divorce clause. A of funds. The second most common no-fault divorce clause is activated when a supermajority is 80%, as sought by 14%. supermajority of LPs (by commitment size) Twelve percent of recent funds require a elect to replace the GP of a fund and/or supermajority of 85% or more. prevent the manager from making further investments.

alternative assets. intelligent data. PREQIN SPECIAL REPORT: PRIVATE CAPITAL FUND TERMS FUND FORMATION AND COSTS

GP COMMITMENTS Fig. 15: Average GP Commitment as a Percentage of Fund Size by Vintage Year It is standard practice for the GP managing 12% 11.89% a private capital fund to also make a financial commitment to the vehicle on 10% 9.67% the same basis as the regular LPs in the 8.60% 8.48% 8% 7.47% fund, also known as ‘skin in the game’. Mean 6.34% This is seen as an important driver in the 5.44% 6% 5.32% 5.30% alignment of interests between GPs and 5.03% 5.00% 4.93% 4.87% Median 4.25% 4.10% 4.13% LPs. Historically, the benchmark for GP 4% 3.74% commitments has been 1.00% of the total 3.00% 2.84% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% fund size; however, Fig. 15 illustrates how 2% 1.30% 1.20% 1.25% 1.00% a significant proportion of GPs are making 0% larger commitments (relative to the fund Size) (% of Fund GP Commitment Average size). This demonstrates that many GPs are 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 bucking the trend and are contributing a larger proportion of capital to private capital funds, perhaps as a way to better Vintage Year 2017/Raising align interests with LPs and demonstrate Source: 2017 Preqin Private Capital Fund Terms Advisor their financial commitment to a fund. fund size group to $8.5mn for the largest 2007). For such vehicles seeking to raise MINIMUM LP COMMITMENTS funds. less than $100mn, the mean limit on fund Fig. 16 shows that for recent funds organizational expenses borne by the (funds raising as at May 2017 or with a FUND ORGANIZATIONAL EXPENSES fund stands at $0.65mn. This figure then 2016/2017 vintage), the median minimum Most partnership agreements make increases for each size group shown, and commitment size increases as the overall provisions for the costs specifically the average limit for the largest group of fund size increases. The chart shows that associated with the formation of the funds seeking to raise, or having previously the median values slope up from just fund to be borne by the fund up to a raised, $1bn or more is $2.92mn. $0.1mn for funds smaller than $50mn certain amount, rather than being an to a median LP commitment of $5.0mn expense to the GP. The allowable limit to for funds sized at $1bn or more. The organizational expenses borne by the fund mean values also increase as the fund generally rises with the size of the fund, size increases, from a mean minimum LP as shown in Fig. 17 (using a larger sample commitment of $1.1mn for the smallest size of vehicles raising and closed since

Fig. 16: Average Minimum LP Commitment by Fund Size (Funds Fig. 17: Average Limit on Fund Organizational Expenses Borne Raising & Vintage 2016/2017 Funds Closed) by the Fund (Funds Raising & Funds Closed since 2007) 9 8.5 3.0 2.92 7.9 8 7 2.5 6 5.4 5.0 5.0 5.0 Mean 2.0 5 1.84 4.1 1.60 ($mn) 4 Median 1.5 3 1.31 2 1.1 1.2 1.1 Expenses ($mn) 1.0 1 0.5 0.65 0.1 Average Minimum LP Commitment Minimum LP Commitment Average 0 0.5 Average Limit on Fund Organizational Organizational Limit on Fund Average

$1bn 0.0 or More $50mn

Less than Less Less than $100-249mn $250-499mn $500-999mn $1bn $50-99mn

$100-249mn $250-499mn $500-999mn $100mn or More Fund Size Fund Size Source: 2017 Preqin Private Capital Fund Terms Advisor Source: 2017 Preqin Private Capital Fund Terms Advisor

ith every purchase of the 2017 and as a percentage of the LP’s Funds can be selected based on size, WPreqin Private Capital Fund Terms commitment to the fund; location and type, and the details Advisor, clients will have a 12-month • The resulting net performance of can then be viewed fund by fund, subscription to the Fund Terms Online the fund from the LP’s perspective, enabling you to see the variation in platform, which enables users to: based upon a range of reasonable management fees, carried interest ■■ Identify benchmark terms for any assumptions on the fund’s gross etc. All data can then be downloaded fund: the benefit of the online system performance, with the results into MS Excel for further analysis. is that, rather than getting a series of expressed in terms of net multiple Please note the names of funds are different management fees that apply and IRR; not provided. to funds of different types, one can • The corresponding implications simply enter the size and type of the for the GP, identifying the fees The online system is designed to help proposed fund and then directly see and carry earned over the lifetime both GPs and LPs to consider the most the benchmark terms that apply to a of the fund, again based upon a appropriate terms for new funds, and to fund of this specific type and size; range of reasonable assumptions assist them in negotiations. ■■ Assess economic impact: the online regarding the fund’s gross model calculates the total fees and performance. Please visit www.preqin.com/fta for more carry payable over the lifetime of the ■■ Consider the impact of alternative information. fund, based upon the benchmark terms: the user can then also vary terms and a range of assumptions the terms away from the indicated about the fund’s gross performance. benchmarks, and the model will In other words, the model reduces a calculate the net effect of these complex set of economic terms down changes on the total lifetime costs to some simple metrics that can be and net returns for the LP, as well as readily compared across different the economic implications for the GP; funds: ■■ Download fund terms: if you wish to • The aggregate fees payable by the compare terms at fund level then you LP over the lifetime of the fund, can select and download fund-level expressed in monetary terms terms and conditions information.

alternative assets. intelligent data. PREQIN SPECIAL REPORT: PRIVATE CAPITAL FUND TERMS 0.00 0.00 0.00 0.00 2016 0.52 0.69 0.36 0.00 2015 0.02 0.33 1.74 1.00 0.43 0.31 0.29 0.32 2014 0.06 0.67 0.20 2.14 0.03 2.00 2013 0.06 0.67 0.20 2.14 0.03 2.00 2.41 1.73 2.20 2012 0.09 1.23 0.22 1.27 0.14 2.00 2.55 1.85 2011 0.33 0.49 0.39 2.47 0.29 2.00 2.33 2.07 0.72 0.61 0.02 2010 0.47 1.58 0.44 1.58 0.57 5.85 2.29 0.63 0.51 0.00 0.07 0.03 2009 0.41 0.98 0.46 1.90 0.52 2.50 0.65 2.56 1.48 0.02 0.01 0.34 0.34 0.01 2008 0.60 1.21 0.46 2.96 0.61 2.50 2.57 0.71 0.00 0.02 0.39 0.02 0.03 2007 0.76 1.13 0.20 0.49 2.50 2.03 0.59 0.06 0.73 0.66 0.02 2006 1.13 0.93 0.59 2.50 1.79 0.82 0.11 0.90 0.84 0.04 2005 0.77 1.98 0.48 2.50 0.91 0.28 1.84 1.03 0.02 2004 Annualized Total Fees and Costs (As a % of LP Commitment to the Fund) to a % of LP Commitment (As and Costs Fees Total Annualized 0.51 2.50 2.55 0.96 0.13 0.90 0.68 0.02 2003 2.59 2.54 0.19 2002 0.39 2001 50 USD 50 USD 15 USD 65 USD 645 EUR 300 GBP 378 GBP 415 GBP 508 USD 650 USD 776 USD 581 USD 350 USD 150 USD 154 USD 858 USD 731 USD 476 USD 150 USD 503 USD 434 USD 346 USD 563 USD 475 USD 2,300 EUR 1,022 USD (*for Target) (*for Fund Sizes (mn) Sizes Fund Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Liquidated Liquidated Liquidated Liquidated Liquidated Liquidated Liquidated Liquidated Liquidated Fund Status Fund Europe Europe Europe Europe Europe Europe Diversified Diversified Latin America Latin Region Focus North America North America North America North America North America North America North America North America North America North America North America North America North America North America North America North America North America North America Multi-Regional 2001 2006 2000 2007 1997 2003 2008 2005 2002 1999 2006 2008 2005 2001 1999 2007 2004 2009 2007 1997 1996 1999 1997 2001 2000 1993 Vintage Seed Seed Buyout Buyout Buyout Buyout Buyout Buyout Growth Mezzanine Mezzanine Fund Type Fund Early Stage Early Stage Early Stage Early Stage Early Stage (All Stages) (All (All Stages) (All Early Stage: Early Stage: Fund of Funds Fund Fund of Funds Fund Fund of Funds Fund Fund of Funds Fund Fund of Funds Fund Fund of Funds Fund Fund of Funds Fund Fund of Funds Fund

Venture Capital Capital Venture Venture Capital Capital Venture

This data has been gathered from Freedom of Information Act (FOIA) sources, showing the actual fees paid by a number of public investors in private capital funds. capital private in investors public of number a by paid actual the fees showing sources, (FOIA) Act Information of Freedom from gathered been has data This

intended to give users of the Fund Terms Advisor an insight into the actual fees charged by specific individual funds, which they may find useful as benchmarks. benchmarks. as useful find may they which funds, individual specific by charged actual the fees into insight an Advisor Terms Fund the of users give to intended The following tables are a sample of the actual fees and costs incurred by LPs on their investments. The full book contains this information for 1,718 separate funds and is is and funds separate 1,718 for information this contains book full The investments. their on LPs by incurred costs and actual the of fees sample a are tables following The ABRY Mezzanine Partners ABRY Senior Equity II ABRY ABRY IV ABRY Abingworth V Bioventures III ABRY Abingworth Bioventures IV Abingworth Bioventures Aberdare Ventures IV Ventures Aberdare Aberdare Ventures III Ventures Aberdare Aberdare Ventures II Ventures Aberdare Aberdare Ventures Aberdare Aberdare II Annex Fund II Annex Aberdare Abbott Capital Private Equity Private Capital Abbott VI Fund Abbott Capital Private Equity Private Capital Abbott V Fund Abbott Capital Private Equity Private Capital Abbott IV Fund Abbott Capital Private Equity Private Capital Abbott III Fund 5AM Ventures Fund II Fund Ventures 5AM 5AM Ventures Fund I Fund Ventures 5AM 57 Stars Global Opportunities57 Stars 2 (CalPERS) Fund 57 Stars Global Opportunities57 Stars 1 Fund 3i UKIP II 3i UK Investment Partners 3i UK Investment 3i Eurofund III 3i Eurofund 3i Eurofund II 3i Eurofund 2001 Brinson Partnership Fund 2001 Brinson Fund Partnership Program 2000 Brinson Partnership Fund 2000 Brinson Fund Partnership Program Fund Fund II 1818 Fund NET COST LISTINGS COST NET

14 © Preqin Ltd. 2017 / www.preqin.com DOWNLOAD DATA PACK: www.preqin.com/PCFT17 0.79 0.93 1.44 2016 1.54 2.71 2015 1 0 0 0 0.9 0.5 0.91 0.86 0.96 0.57 0.38 0.83 0.91 0.86 0.79 0.24 1.61 0.98 1.36 0.57 1.02 0.19 0.45 2014 1 0.85 1.11 1.73 0.77 1.64 1.25 0.03 0.75 1.83 0.28 0.92 2013 0.41 1.11 1.26 1.85 1.07 1.64 1.25 0.75 0.03 1.83 0.28 0.92 2012 0 1.3 1.56 1.12 1.19 2.32 2.08 0.57 0.02 0.97 0.40 0.93 2011 0 0.9 1.78 1.78 1.22 2.11 1.54 0.01 0.03 0.92 1.73 2010 0.9 1.3 1.95 1.86 1.34 2.25 2.11 1.17 1.32 0.02 0.99 1.99 2009 2.5 2.18 1.69 1.44 1.06 0.76 0.43 0.12 1.05 1.83 2008 4.4 3.85 2.04 1.24 2.71 2.93 3.23 0.06 0.11 1.91 2007 0.4 0.55 0.37 1.24 1.67 1.88 0.91 0.88 1.97 2006 2.2 2.2 1.24 1.67 0.06 1.66 1.31 0.76 2.08 2005 2.2 2.2 1.25 1.67 1.83 1.49 0.73 2004 Annualized Total Fees and Costs (As a % of LP Commitment to the Fund) to a % of LP Commitment (As and Costs Fees Total Annualized 2.58 1.76 1.53 0.84 2003 2.56 1.65 1.49 0.83 2002 1.59 1.65 1.35 2001 47 USD 500 EUR 352 USD 692 USD 979 USD 918 USD 408 USD 206 USD 140 USD 144 USD 147 USD 527 USD 420 USD 738 USD 374 USD 150 USD 770 USD 751 USD 275 USD 286 USD 418 USD 449 USD 427 USD 314 USD 950 USD 1,054 USD 1,900 USD 1,350 USD 1,600 USD (*for Target) (*for Fund Sizes (mn) Sizes Fund Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Closed Liquidated Liquidated Fund Status Fund Asia Asia Asia Europe Europe Europe Europe Europe Europe Europe Europe Region Focus North America North America North America North America North America North America North America North America North America North America North America North America North America North America North America North America North America North America North America 2011 2009 2008 2007 2004 2003 2002 2012 2011 2009 2012 2000 2009 2006 1999 2000 2012 2001 1998 2001 1999 2005 2009 2000 1999 1996 2015 2005 2008 2011 Vintage Buyout Buyout Buyout Buyout Buyout Buyout Growth Growth Growth Growth Growth Fund Type Fund Early Stage Early Stage Early Stage Early Stage (All Stages) (All (All Stages) (All (All Stages) (All Secondaries Secondaries Fund of Funds Fund Fund of Funds Fund Fund of Funds Fund Fund of Funds Fund Fund of Funds Fund Fund of Funds Fund Fund of Funds Fund Fund of Funds Fund Fund of Funds Fund Fund of Funds Fund Venture Capital Capital Venture Venture Capital Capital Venture Venture Capital Capital Venture Adams Street Partnership Non- Partnership Street Adams 2011 Fund US Developed Adams Street Partnership Non- Partnership Street Adams 2009 Fund US Developed Adams Street Partnership Non- Partnership Street Adams US 2008 Fund Adams Street Partnership Non- Partnership Street Adams US 2007 Fund Adams Street Partnership Non- Partnership Street Adams US 2004 Fund Adams Street Partnership Non- Partnership Street Adams US 2003 Fund Adams Street Partnership Non- Partnership Street Adams US 2002 Fund Adams Street Partnership Partnership Street Adams Markets 2012 Fund Emerging Adams Street Partnership Partnership Street Adams Markets 2011 Fund Emerging Adams Street Partnership Partnership Street Adams Markets 2009 Fund Emerging Adams Street Global Secondary Street Adams V Fund Adams Capital Management III Capital Adams Global Street Adams Opportunities Secondary II Fund Acon-Bastion Partners II Partners Acon-Bastion Adams Capital Management II Capital Adams Accel VIII Accel Equity III Partners ACON Accel VI - S Accel Accel VI Accel Accel Europe Investors 2001 Investors Europe Accel Acacia Venture Partners II Partners Venture Acacia ABS V Capital ABS VI Capital ABS Capital IV ABS Capital ABS Capital III ABS Capital ABS Capital II ABS Capital ABRY VIII ABRY Fund Fund V ABRY VI ABRY VII ABRY

alternative assets. intelligent data.

PREQIN SPECIAL REPORT: PRIVATE CAPITAL FUND TERMS

OCTOBER 2017

PREQIN

Alternative Assets Data & Intelligence

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