LPs Focused On GP Commitment, Management Fees

It wasn’t necessarily the headline news coming out of the latest (and always excellent) Probitas Partners survey of institutional investors, but deep in the survey report you can learn which partnership terms and conditions LPs are most focused on going into the new year.

Altogether more than 180 investors around the world–a mix of funds-of-funds managers, public pension funds, endowments, foundations and others–participated in the November survey.

Respondents were asked to pick up to three terms on which they are most focused. The leading response, picked by 53 percent, was the GP commitment, followed by management fees (52 percent), how carried interest is divvied up among the senior investment professionals (32 percent), and a cap on fund size (31 percent).

Slightly further down the list came the key-person clause (30 percent), transaction fee splits (27 percent) and carry distribution waterfalls (27 percent).

The survey also found evidence that the highly LP-friendly list of “preferred terms” published in late 2009 by the Institutional Limited Partners Association has attracted widespread support among investors. Nearly two-thirds (64 percent) of respondents to the survey said the preferred terms “provide a useful starting point for terms negotiations,” while another one in five said they “are important and we benchmark compliance with the [preferred terms] for funds we review in detail.”

The list of preferred terms includes such GP-bone-chilling recommendations as a requirement for GPs to return all contributed capital plus a preferred return before receiving carry distributions, another to effectively send 100% of transaction fees to investors (rather than sharing), and another to allow for a no-fault divorce upon a two-thirds in interest vote of LPs.

According to the survey report, ILPA is working on a second edition of its report, “ILPA Private Equity Principles,” in which the preferred terms are listed.