The fine print around alternative investment funds such as private equity, debt and venture capital puts off three-fifths of limited partners, according to a study of what discourages people from entering certain funds.
A global study of limited partners – aka investors – in private equity and other alternative funds finds that three-fifths (60 per cent) walk away over terms and conditions.
The report, by research firm Preqin, comes amid widespread commentary on how wealth managers, family offices and high net worth individuals are being encouraged to put money into non-public investments because of their purported superior yields. However, investing in fields such as venture capital, private equity and credit can involve a mass of conditions that can be complex to understand, and may also put investors off.
The study found that 20 per cent of investors said they “frequently” walked away from negotiations over terms and conditions. Transparency and alignment of interest are front of mind for LPs, rather than objections to the fees they may have to pay. For example, fewer investors mention concerns about the amount of fees charged than concerns about transparency at fund level (59 per cent).
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, Preqin said.
Prominent among investor concerns is transparency at the fund level, which 59 per cent of investors indicated is an area where alignment can be improved. This is a slight increase from last year’s survey (54 per cent), suggesting that this 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 showing a drop in the concern about performance fees. This suggests that LPs are more comfortable that GPs are aligned with them in this respect at least, the report continued.
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 per cent for recent private capital funds. Now, fees sit closer to 1.90 per cent 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 per cent of funds of 2021/22 vintage charging industry-standard carry of 20 per cent.
Most funds across the private capital markets structure carried interest on a “whole fund” basis, though there is variation across asset classes and strategies. Similarly, over the majority (62 per cent) 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 per cent. The lack of substantial change to performance fee terms suggests market participants are content to leave the issue as it stands.
“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 that 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,” RJ Joshua, VP Research Insights at Preqin, said.