No more 2…
This will probably only come as a surprise to the most distracted – or wistful – of general partners (GPs), but limited partners (LPs) have definitively rejected the charging of 2 percent management fees for infrastructure vehicles. 81.3 percent of LPs canvassed believe the ideal management fee falls between 1.4 percent and 1.5 percent. In comparison, only 18.8 percent agree with paying management fees in the range of 1.8 percent to 2 percent.
The same goes for the other side of the ‘2 and 20’ equation. Only 10 percent of LPs felt paying 20 percent in carried interest to be appropriate for an infrastructure fund. An overwhelming 65 percent of respondents believed that 15 percent is the ideal amount of a carry for infrastructure vehicles, with about 25 percent saying carried interest of 12.5 percent would be the ideal figure.
On the whole
A resounding 70.8 percent of LPs argued that carried interest should be charged on the whole fund with only 12.5 percent of respondents agreeing to carry on a deal-by-deal basis. The remaining 16.7 percent of LPs had no preference.
'8' is the magic number
Regarding the optimum hurdle rate – i.e. the return LPs want to see before GPs are entitled to charge carried interest – a majority of respondents (57.1 percent) said 8 percent to be the best hurdle rate. About 28.6 percent would only like to see GPs earn carry once the hurdle rate hits 10 percent and circa 14.3 percent would be happy with a hurdle of 7 percent.
Cut it down…
After GPs have put LP money to work and a fund’s investment period has ended, 70.8 percent of LPs felt that management fees should be reduced compared with the fees charged during the investment period, with only 29.2 percent of respondents saying that fees should remain the same.
… and give it back
When it comes to the question of what fund managers should do with the fees charged to portfolio companies, LPs came close to a unanimous answer with 83.3 percent saying GPs should give 100 percent of these fees back to LPs. Only a minority of 12.5 percent was happy with the idea of getting a rebate of just 50 percent of the fees charged to portfolio companies.
Walk like you talk
How committed should GPs be to the funds they are promoting? Almost a third – 30.4 percent – of LPs feel that GPs should own 5 percent of their funds, with an equal amount arguing that GPs should either own between 5 percent and 10 percent of their funds, or over 10 percent. Close to 22 percent of respondents were comfortable with an ownership stake of just 2 percent.
LPs place a great deal of importance on the senior members of a fund’s team and are keen to safeguard their money if one of the team’s key members departs. So it’s unsurprising to find out that an overwhelming 78.3 percent of those canvassed answered in favour of having a so-called ‘key man’ clause in place when allocating money to an infrastructure fund, with only 21.7 percent comfortable if this proviso is absent.