Distributions from realizations have vastly improved from the 2009 drought and portfolio valuations have recovered nicely from the troughs for the most part.
Moreover, fund partnership terms are much more favorably aligned between LPs and their general partners. According to London industry tracker Preqin Ltd.'s latest study of about 2,400 funds globally, investors are satisfied in general with terms and conditions of their current PE fund investments.
After years of LP grousing with GPs over terms -- fee structure for carried interest, management fees, transaction fees and so on -- the pendulum has shifted in favor of LPs; basically a function of supply and demand. As more private equity firms return to market for new capital, there's simply less money to go around to all the funds.
The most meaningful change has been in so-called transaction fees, or deal fees charged by private equity firms for "services" rendered to the portfolio companies when they get bought out.
Such fees cover unspecified advisory fees that could range from 0.05% to 4% of deals valued at less than $500 million, and 0.17% to 2% for deals between $500 million and $1 billion, according to a November report from New York law firm Dechert LLP.
LPs now receive a higher proportion of transaction fees -- 100% is the median for vintage 2011 and 2012 funds year to date, versus 50-50 or better for pre-crisis vintages. Transaction-fees sharing has improved over the years from a median of 63% in 2006 to 80% in 2007 and 2009 to 2010.
That's not to say that terms have improved across the board, however. While investors have made headway on transaction fees, they say management fees remain a bone of contention, to say nothing of carried interest, which has stayed steady at 20% overall.
For many years, the industry standard for management fees has pretty much been at 2% of the fund's capital commitments, except during the buyout boom. In vintage years 2006 and 2007, the mean for management fees stood at 2.04% and 2.01%, respectively. YTD the mean is at 1.92%, Preqin said, compared with 1.94% in 2011 and 1.93% in 2010 for investment periods averaging five years.
About 68% of investors said management fees could be improved, the study said, and that percentage is higher than in a similar study last year. The reason: Public pension funds and other institutional investors looking for alpha returns on portfolios have stepped up the competition for strong performing private equity funds, allowing the GPs to negotiate fund economics on their terms.
"The challenging economic climate has meant that investors have been keener than ever to invest with what they perceive to be the strongest fund managers," said Preqin's Sam Meakin, "and the majority of investors would be willing to pay higher management fees to GPs with the best track records."
One interesting twist to the issue of management fees can be found in the recent adoption by a few large public pension funds of separately managed accounts. Pension fund managers in Texas, New Jersey and California have recently entrusted significant amounts of money to managed accounts, whereby the GPs involved -- Blackstone Group LP, Kohlberg Kravis Roberts & Co. LP and Apollo Global Management LLC -- carve out specific opportunistic investments for the pension systems while giving them a break on fees.
For instance, New Jersey State Investment Council has committed a total of $1.5 billion to Blackstone, paying the New York buyout firm 15% of the cash profits as carried interest, versus the standard 20%. In addition, Blackstone will get a yearly management fee of 1%, compared to the 1.5% that most large buyout firms charge. Plus, the management fee is only on the portion of money that's actually been invested, as opposed to committed but yet to be invested amounts. In most cases, management fees usually kick in the moment investors commit capital, and on the full commitment.
In recent weeks the California State Teachers' Retirement System committed $250 million to CalSTRS New and Next Generation Manager Fund III, a separate account vehicle managed by Invesco Private Capital, Preqin said. Also, the New York State Common Retirement Fund launched a separate account managed by 57 Stars, targeting midmarket funds and co-investment opportunities in European markets.
In February the North Carolina Department of State Treasurer disclosed plans to form a co-investment program, which could lead to a managed account mandate.
Preqin's study indicates that more of these accounts may be in the offing, involving a select number of GPs. More than a third of the LPs interviewed said they would consider allocating capital to a separate account in the future.
About 10% of LPs interested in separate accounts manage between $5 billion and $25 billion, while 11% of LPs manage more than $25 billion, the survey said.
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