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Big funds’ GP-friendly terms aren’t deterring investors – Citco

'Super carry' provisions letting GPs keep more than the traditional 20% help boost larger funds' profit-sharing proportions.

Investors aren’t deterred by the GP-friendly structures and terms featured in many of the largest funds, a new study from Citco shows.

Deal-by-deal waterfall structures and higher carry rates offered by some of the biggest funds aren’t keeping them from achieving higher returns, according to Citco’s study of data from its Citco Waterfall application.

On average, funds with more than $5 billion in AUM have generated carry of 19.72 percent versus just 16.57 percent for those with under $100 million in AUM. That difference is accounted for, in part, by an increase in premium carry provisions in larger funds that entitle GPs to more than the traditional 20 percent rate.

But such funds are also delivering higher returns to investors, at least when measured as an IRR or a multiplier on contributed capital, and those returns offset the higher carry rates.

Additionally, two provisions meant to bring GP and LP interests closer together have gained favor with the largest funds, the firm said. More and more offer post-carry fair value tests and clawback guarantees.

That may partly explain why investors aren’t deterred by big funds’ increasing preference for deal-by-deal waterfall structures: 39 percent of funds with $5 billion or more feature more GP-friendly deal-by-deal waterfalls, while 20 percent of the lowest tier (less than $100 million size funds) used total return, or fund-level, waterfalls.

Meanwhile, the study showed that hurdle rates did not demonstrate a clean correlation with fund sizes. While the figures dropped progressively from the smallest AUM tier (7.66 percent) to the second largest (7.2 percent), they shot up for the largest tier (8.38 percent).