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In a changing world, fund terms have proven remarkably stable across vintages from 2015 to 2022, according to data from international law firm Proskauer, shared exclusively with Infrastructure Investor.
Proskauer’s data compares fund terms in Europe and the US across two vintage periods: 2015-19 and 2020-22. It is based on flagship, multi-billion-dollar vehicles from managers in the top 25 of our Infrastructure Investor 100 ranking of the world’s largest equity fund managers.
Only managers for which there are vintages to compare are included in the sample.
Overall, there has been only minimal movement of key fund terms from the prior vintage period to the current one.
The analysis shows that headline management fees varied between 1.20 and 1.75 percent in Europe for the funds examined and that these figures did not change across vintage periods. The US funds displayed similar stability from vintage to vintage, but 80 percent charged a 1.50 percent headline management fee.
Volume discounts were a factor in all the US funds, ranging between 0.10 to 1 percent, depending on the size and the fund. Generally, it would require a commitment of no less than $75 million to qualify for the lowest discount and at least $220 million to be considered for a fund’s maximum discount. Data for Europe was limited.
“Discounting has historically been addressed mainly in side letters, but GPs are now happier to set it out in their LPAs,” says Peter Olds, partner in Proskauer and lead on the analysis. This tendency has been more pronounced in the US than in Europe, where discounts more often remain hidden in side letters.
Early bird discounts featured in all the recent US funds, and most US funds also provided loyalty discounts for the most recent vintage period.
According to Olds, this reflects fund sponsors placing a premium on large, repeat commitments from a core group of LPs in order to continue growing fund sizes from vintage to vintage.
The stable fee terms do not seem to be under additional pressure, highlights Monica Arora, partner and co-head of the Private Funds Group at Proskauer, citing the changes to the regulatory climate in the US, related burdens on sponsors and growing investor awareness of the same.
“Over the past 12-plus months, everyone in the industry in the US has become even more focused on the regulatory climate and potentially significant changes that would impact actual terms of private funds, such as clawbacks, fiduciary duty and the indemnification scope.
“The general administrative costs and burdens on sponsors and their operations are growing, including with respect to ESG considerations and in compliance with these new and pending regulations. This is acutely felt by the US fund-sponsor community right now, and that is not lost on investors. I think this will make it hard for there to be successful fee pressure.”
The stability of terms may seem surprising across a timeline ranging from 2015-22 and more than half an economic cycle. Either the terms on offer must largely be what is needed for the industry to stay healthy, or the industry is ripe for some degree of creative destruction.
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