Preqin released the results on Monday, June 21, of a May survey of 50 prominent institutional investors in private equity funds, conducted to assess current investor attitudes to fund terms. Preqin noted that private equity fund terms and conditions have drawn considerable attention from institutional investors since the 2009 release of Institutional Limited Partners Association (ILPA)'s Private Equity Principles, which set out a series of preferred terms.
Four-fifths of respondents in the Preqin survey reported seeing a shift in the balance of power toward the investor during negotiations of fund terms and conditions in the past year. Fund managers are already offering investors concessions, evidenced by 41% of investors seeing an improvement in the share of deal-related fees they are set to receive from funds.
Despite concessions from fund managers, the proportion of investors who agreed that general partner-limited partner (LP) interests are properly aligned dropped from 69% in 2009 to 58% in 2010, indicating increased investor dissatisfaction with fund terms.
Seventy-one percent of respondents said they may not invest in a fund as a result of its failure to adhere to ILPA's Private Equity Principles. Of these, 13% asserted that they definitely would not invest in a fund that did not follow the principles.
Management fees remain a major source of discontent for investors, with 64% of respondents expressing dissatisfaction at the level and structure of management fees charged. More than half of investors felt that the LP-friendlier terms and conditions they are now seeing will continue to be offered over the longer term. Just 9% felt any concessions were only temporary.
In order to see the changes in terms and conditions over the past year, Preqin also analyzed actual fund terms taken from the private placement memorandums (PPMs) of the most recently launched private equity funds. The data show that pressure from LPs is already affecting the terms and conditions being used, the firm said. The analysis included these key findings:
