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AltAssets is the private equity news and research service from Almeida Capital
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PRINT THIS PAGE SCM private equity terms & conditions study: 200630/05/2007. Source: SCM Strategic Capital Management AG. 
SCM Strategic Capital Management's 4th Annual Review of Private Equity Terms & Conditions analyses the 252 new private equity fund offerings that came to market in 2006. SCM’s 4th Annual Review of Private Equity Terms & Conditions1 shows a continuation of high fundraising activities and increasing fund sizes. Discounting first time funds, 87% of the successor funds raised by the managers were larger than their predecessors.
Fundraising activity was again driven by the large-end of fund offerings, with 15% of the funds reviewed raising more than USD1.0bn accounting for almost 70% of the total volume raised within the sample. There has been huge growth in the number of Asian private equity funds raised, from seven per cent in 2004 to 18 per cent in 2006. There was also big growth in funds with a global strategy, up from 12 per cent to 21 per cent.
Despite growing fund sizes, team sizes remain static
The trend towards larger fund sizes has, however, not resulted in an increase of General Partners’ average team sizes.
“One would expect that the foreseen increase of multi-regional investment activities and the trend towards higher “rest-of-the-world” provisions of regionally focused funds would lead to an increase of investment professionals who possess the necessary local networks as the geographical focus especially of larger funds” says Dr. Stefan Hepp, CEO of SCM. In fact team sizes have stayed more or less static. “Quality and quantity of the management team is an important factor institutional investors should pay attention to.”
The bigger the fund - the lower the fees?
The average management fees of slightly below 2% over all fund size segments reflects today‘s reality. For all but the smallest funds the observation that management fees decline as a function of fund size holds true.
However, on a year-to-year comparison, management fees have even increased somewhat in 2006 for the majority of the fund size segments in the sample. This could be an indication for the further strengthening of the bargaining position of many GPs faced with an ever growing demand from investors.
Carried interest: 20% remains market standard
GPs hardly ever increase the carried interest in order to respond to excess demand for their new fund offerings. The 20% carried interest remains the standard for the industry. “The GPs rather tend to raise larger funds in order to stay competitive” says Hepp, which is certainly true for the buyout industry.
Not much changes in the distribution mechanism for the carried interest (waterfall) but significant differences between US and European funds
While in the US 67% of the funds use a deal-by-deal carry that applies the carried interest formula to each realization, this concept is only used by 9% of funds in Europe.
In Europe, 72% of the GPs have to return all paid-in capital (plus hurdle rate) prior to receiving carried interest.
“Only in the large buyout segment a few European GPs have managed to introduce a deal-bydeal waterfall but generally this concept has not gained much ground outside the US”.
Faced with an ongoing growth in demand for their fund offerings, many GPs are getting pickier about the LPs they like to have as investors in their funds and try to exercise more control over their investor base.
“One example is Sequoia Capital who does not allow fund-of-funds as LPs in their future funds. But GPs also use restrictions on secondary sales of partnership interests such as first right of refusal for existing LPs or the right to approve new investors to manager the composition of their investor base after the closing of their funds.”
SCM Strategic Capital Management AG was founded in 1996 and provides management and advisory services for institutions building Private Equity and/or international Real Estate portfolios. With more than USD 4.5 bn of assets currently advised SCM ranks among Europe's leading providers of capital for Real Estate and Private Equity funds and enjoys unsurpassed access to the world's foremost managers in these areas.
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