This research analyses the current terms and conditions of private equity and venture capital funds, comparing the results with the findings of MJ Hudson’s previous research. It discusses both the drivers behind current trends in terms and conditions, as well as the implications for both investors in private equity funds (LPs) and those managing such funds (hereafter referred to in this report as either Managers or GPs). The report aims to provide both LPs and GPs with an enhanced understanding of the current strengths and weaknesses of the fundamental economic, alignment and governance terms impacting private equity fund commitments.

The report examines four areas pertaining to the relationship between LPs and Managers, as follows:

  • The report first examines the core economic terms that govern a private fund. The report provides analysis of the levels and calculation methodologies of management fees (both during and post the investment period); the prevalence and nature of management fee discounts; and the operation of distribution waterfalls and carried interest models (including hurdle rates, ratchets and catch-up). Innovations in carried interest models and the distribution waterfall are examined, and deal-by-deal enhancement (e.g., interim clawbacks, carry escrows and guarantees of GP clawback obligations), are likewise covered;
  • The report then examines the key terms that impact upon the alignment of interests between LPs and Managers: the size of the GP commitment; management fee offsets; successor fund restrictions; and co-investments;
  • Next, the report looks at the governance of private funds and presents current trends in the key investor protections: GP removal (with cause and without); key person events; change of control provisions; indemnification; conflicts; the role and operation of the Limited Partner Advisory Committee (LPAC); reporting provisions; and the application of the most favoured nation (MFN) treatment;
  • Finally, and new to this edition of the report, a number of other factors that influence the relationships between LPs and GPs are examined, including investment restrictions and diversification thresholds; fundraising subscription periods and term extensions; and fund-level borrowing and bridge financing.

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