THE 2018 PREQIN PRIVATE CAPITAL FUND TERMS ADVISOR – SAMPLE PAGES 1. EXECUTIVE SUMMARY Fig. 1.1: Annual Global Private Capital Fundraising, 2000 - 2018 YTD (As at June 2018) 2,500 2,307 2,340 2,044 1,945 2,000 1,855 1,632 1,642 1,659 nvestors remain satisfied with private The opaque nature of private capital 1,570 1,500 1,424 capital, with fundraising in 2017 surpassing investments makes it consistently difficult 1,333 I 1,183 1,118 the $800bn mark for the first time on record for a consensus or benchmark to be reached 1,000 921 (Fig. 1.1). More capital was also distributed across the industry. Unique features change 811 768 848 667 688 712 669 700 across fewer funds, resulting in the average the profile of a given fund, and greatly 605 583 547 587 575 500 387 451 fund size growing to $507mn in 2017 affect how fees are set out and levied. 2017 365 327 322 274 239 172 222 compared to $411mn in 2016. This suggests once again saw greater movement towards 135 106 that competition in the market remains transparency throughout the industry, as 0 fierce and that managers will need to ensure voiced by many investors interviewed by 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 they are continually providing satisfaction Preqin during the course of the year. It is to and striving for an alignment of interests clear at this point that the momentum is 2018 YTD Year of Final Close with their LPs. Positive investor sentiment is shifting towards the demands of the investor, No. of Funds Closed Aggregate Capital Raised ($bn) encouraging for the industry, with investors especially in a hyper-competitive private recognizing the benefits of utilizing private capital fundraising environment. equity, private debt, real estate, infrastructure Fig. 1.2: Extent to Which LPs Believe that GP and LP Interests Are Properly Aligned, and natural resources in their investment The 2018 Preqin Private Capital 2013 - 2017 portfolios to achieve their individual Fund Terms Advisor offers the most 100% 4% 4% 5% investment objectives. comprehensive data and intelligence on fund 10% 6% terms and conditions in the industry and 90% In an intensely competitive fundraising aims to reveal the latest trends and current 80% market, it is important for GPs to closely market sentiment that surrounds this opaque 70% Strongly Agree align interests with LPs in the terms and area. The 12th edition in the series, the Fund 63% 59% 57% 60% 60% 65% conditions agreement to ensure a positive Terms Advisor uses fund terms for over 9,100 Agree working relationship during a fund’s lifespan, private capital funds and compiles data from 50% and potentially thereafter, and maximize our current databases, historical datasets and Disagree profitability of both the firm and the LP and GP surveys to provide comprehensive 40% institutional investor. If this is accomplished, it and accurate insight into the private capital 30% Strongly Disagree becomes more likely that the LP would look to fund terms universe. 27% 20% re-invest should the economic environment Proportion of LP Respondents 32% 27% 35% 25% prove conducive to doing so. Additionally, any LP SATISFACTION WITH ALIGNMENT OF 10% problems in fund terms and conditions from INTERESTS 10% 0% 1% 4% 2% 5% the outset may be compounded over the In December 2017, we asked LPs throughout Jun-13 Jun-14 Jun-15 Dec-16 Dec-17 lifespan of the fund. the private capital industry for their views on © 2018 Preqin Ltd. 1 THE 2018 PREQIN PRIVATE CAPITAL FUND TERMS ADVISOR – SAMPLE PAGES fund terms and conditions and to what extent fees broken down by peer group, vintage year Fig. 1.3: Frequency with Which LPs Have Decided Not to Invest in a Fund Due to the Proposed they remain a concern. The results revealed and strategy, and the key issues among GP Terms and Conditions that 70% of participants believe that GP and and LP groups. LP interests are properly aligned (Fig. 1.2), up seven percentage points from the proportion TRENDS IN PRIVATE CAPITAL MANAGEMENT 14% of LPs surveyed at the end of 2016. The FEES 23% opposing 30% of respondents felt that Figs 1.5 and 1.6 show the average buyout improvements could be made on the part of fund management fees charged by both Frequently the GP to better align interests. vintage year and fund size. The median management fee for buyout funds has Occasionally In this publication, Chapters 5 and 6 remained static at 2.00%, while the mean fee investigate fund terms and conditions for reported to Preqin has shown some variance Never alternative arrangements such as separate since 2007, generally trending downward accounts and co-investments, with many LPs to vintage 2015 and standing at 1.94% for recognizing the benefits of exposure to such vintage 2018/funds currently raising. As seen vehicles, largely due to the associated fund in Fig. 1.6, management fees decrease as the 63% terms. Chapter 11, which covers governance, fund size increases, with funds more than shows that GPs appear committed to offering $2bn in size reporting a mean management more ways to align interests in a fund, among fee of 1.72%, compared to the 2.13% reported those key-man clauses, no-fault divorce by funds smaller than $100mn. clauses and LP advisory committees. Fig. 1.4: Areas in Which LPs Believe the Alignment of GP and LP Interests Can Be Improved THE 2018 PREQIN PRIVATE CAPITAL FUND MANAGEMENT FEES CAN STILL BE TERMS ADVISOR Management Fees 64% IMPROVED Private capital fund terms and conditions Transparency at Fund Level 43% For the majority (86%) of investors remain a fundamental and important interviewed at the end of 2017, fund terms aspect of both the fund agreements and Performance Fees - How They Are Charged 30% and conditions are so important that they the relationship between GPs and LPs. have on at least one occasion decided not Preqin data in this publication shows that Hurdle Rate 30% to invest in a fund because of the proposed investors have increased their leverage GP Commitment to Fund 26% arrangement (Fig. 1.3). Management fees over fund terms (particularly in the case and transparency are the key areas in which of large LP commitments, investments Performance Fees - Amount 18% LPs believe alignment of interests can be before a fund’s first close, non-economic improved, as true in previous years (Fig. 1.4). clauses etc.), and their negotiating power Lock-up Period 14% Thirty percent of respondents would each like has grown significantly as GPs are eager to Other 3% to see improvements in the hurdle rate and secure institutional capital in a competitive in the implementation of performance fees. fundraising environment. Yet the issue is 0% 20% 40% 60% 80% Chapter 9 looks more closely at management not as simple as GPs purely lowering their Proportion of LP Respondents 2 © 2018 Preqin Ltd. THE 2018 PREQIN PRIVATE CAPITAL FUND TERMS ADVISOR – SAMPLE PAGES headline fees to entice LPs, as to attract LPs mezzanine), real estate, infrastructure and Fig. 1.5: Buyout Funds – Average Management Fee by Vintage Year and justify terms and conditions GPs must natural resources. 2.1% also be able to demonstrate the following: 2.02% their commitment to meaningfully align NET COST LISTINGS 2.00%2.00% 2.00% 2.00% 2.00%2.00%2.00%2.00%2.00%2.00%2.00%2.00% interests with investors, their skill and ability Other key features of this year’s publication 2.0% 1.98% 1.99% 1.96% to generate above-average performance include listings of over 1,200 named funds 1.95% 1.94% 1.94% 1.94% (through key personnel and a solid track showing the net costs incurred by LPs 1.91%1.92% Mean record) and their consideration of other annually (the summary of information on 1.9% aspects of the Limited Partner Agreement total costs has been obtained through 1.84% 1.84% Median such as governance structures, carry, carry Freedom of Information requests to public structures and fee rebates. pension funds in the US and UK, unlike 1.8% the detailed listings of fund terms). The The 2018 Preqin Private Capital Fund publication also contains a listing of some Investment Period Management Fee Terms Advisor focuses its analysis on of the most active law firms in private 1.7% the very latest fund terms and conditions capital fund formation, including sample 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 information collected by Preqin. Preqin assignments. 2018/ Raising goes to great lengths to capture as much up-to-date, relevant data as possible, We hope that you findThe 2018 Preqin Vintage Year and provides the best source of data for Private Capital Fund Terms Advisor to be industry professionals looking for the latest a valuable reference guide and, as ever, we Fig. 1.6: Buyout Funds – Average Management Fee by Fund Size (Funds Raising & Vintage information; we track fund terms and welcome any feedback and comments that 2017/2018 Funds Closed) conditions data for over 9,100 private capital you may have for future editions. 2.5% funds and have conducted exclusive surveys 2.13% 2.00% 2.00% 2.00% 2.00% 2.00% 1.96% 2.00% 1.98% 1.95% with LPs and GPs from around the world. 2.0% This edition provides readers with the actual 1.72% 1.75% terms employed by individual vehicles, as well 1.5% Mean as benchmark terms.