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60% Of LPs Avoid Investing In A Fund Due To Terms And Conditions – Preqin Reports

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Transparency is top of mind for LPs in this year’s Fund Terms Adviser report

Today, Preqin, the global leader empowering the alternatives community with essential data and insight, has published the 2022 edition of its annual Fund Terms Adviser report.

The report shows that three fifths (60%) of Limited Partners (LPs) have decided not to invest in a fund because of terms and conditions, and one fifth (20%) say they have ‘frequently’ walked away from negotiations over the issue.

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The report further shows transparency and alignment of interest are front of mind for LPs, rather than objections to fee levels. For example, fewer investors mention concerns about the amount of fees charged than concerns about transparency at fund level (59%).

As well as data from Preqin Pro and Freedom of Information, the Fund Terms Adviser report also draws data from Preqin’s H2 2022 Investor Outlook survey, which heard from more than 300 LPs globally, on fee terms and conditions.

Investors Continue To See Room For Improvement In Fund Terms

Prominent among investor concerns is transparency at the fund level, which 59% of investors indicated is an area where alignment can be improved. This is a slight increase from last year’s survey (54%), suggesting that the issue remains top of mind for investors.

Though there is room for improvement in some areas, Preqin analysts have seen a trend in the last couple of years with a decrease in the concern around performance fee issues. This suggests LPs are more comfortable that GPs are aligned with them in this respect at least.

Fees Are Driven By Market Conditions

Preqin’s Fund Term Adviser report also showed that the industry standard mean management fee during the investment period is trending below the old norm of 2.00% for recent private capital funds. Now, fees sit closer to 1.90% for buyout and growth funds, and substantially less for all other fund types, except venture capital (VC).

There has been little change in carried interest terms for most of the past decade, with 84% of funds of 2021/22 vintage charging industry-standard carry of 20%. Most funds across the private capital markets structure carried interest on a ‘whole fund’ basis, though here is variation across asset classes and strategies.

Similarly, over the majority (62%) of funds have a hurdle (that is, the level of return that must be achieved by the GP before they are able to claim performance fees) at the industry standard of 8%. The lack of substantial change to performance fee terms suggests market participants are content to leave the issue as it stands.

RJ Joshua, VP Research Insights at Preqin says: “Our investor fee survey shows that terms and conditions are crucial to allocation decisions. Investors are willing to walk away if terms are sufficiently unfavorable, which is why all stakeholders need to be aware of the market consensus for terms and ensure their fees are sufficiently competitive.

Transparency is a key issue; investors are more concerned about this than the absolute level of fees. With increasing pressure on performance, we expect LPs to scrutinize fees ever more closely.”

Key Fund Terms Adviser 2022 facts:

  • Terms and conditions: 60% of Limited Partners (LPs) have decided not to invest in a fund because of terms and conditions, and 20% say they have ‘frequently’ walked away from negotiations over the issue. Meaning that 80% of LPs told Preqin they have either frequently or occasionally decided not to invest in a fund due to the proposed terms and conditions.
  • Transparency: 59% of investors indicated transparency at fund level as an area where alignment can be improved.
  • Management fees: Fees sit closer to 1.90% than 2.00% for buyout and growth funds, and substantially less for all other fund types, except VC.

About Preqin

Preqin, the Home of Alternatives™, empowers financial professionals who invest in or allocate to alternatives with essential data and insight to make confident decisions. It supports them throughout the entire investment lifecycle with critical information and leading analytics solutions.