Buzz Archive:
Terms and Conditions of Private Equity Funds (SJ Berwin)

by SJ Berwin, 8/21/2007

It is perhaps surprising that the headline economic terms of European private equity funds have remained pretty constant for decades - despite the changing market environment in which they are being raised. If a fund cannot raise enough to close it is rarely because its terms are too rich, and improving the terms is unlikely to help. And an oversubscribed fund with a good track record will still find it hard to raise management fees or carried interest rates above well established market norms.

In our annual review of fund terms and conditions, we have once again confirmed that there has been no change in the core economic terms, and - despite a little pressure on management fees - we are not seeing any real moves by investors to disturb the status quo. But, as in previous years, the interesting data is in the detail. (Editor's note--see the VC Experts sister site--PEDataCenter.com for the Fund Formation Database)

First, to reconfirm the basic terms: management fees range from 2.5% for smaller (venture) funds, between 1.75% and 2% for larger and mid market buyout funds, and fall to 1.5% (sometimes a shade less) for mega funds (which we categorise as those raising 2 billion euro or more). Carried interest rates are stuck firmly at 20% and (in Europe) still operate on a "fund as a whole" basis (so the 20% is of profits of the fund not, as is common in the United States, of the profits of each deal). Carry is typically only paid out when investors have received a hurdle rate of return of, normally, 8% (but sometimes 6% or 7%).