Confidence is returning to the private equity markets, but some GPs may only be able to take advantage by structuring deal-by-deal funds. Private equity lawyer Eamon Devlin outlines the benefits of this approach.

Investor enthusiasm for private equity is on the rise. According to a recent research, private equity funds raised some $300 billion in the first three quarters of this year (up 20 percent versus the same period in 2012) which sets up the industry for its biggest nine-month total since the record showing of 2008.

And this improved sentiment applies to the private equity market globally. According to the 2013 Global Private Equity Report by Grant Thornton, there is a brighter view of the fundraising environment across nearly all of the major private equity markets in the world. The percentage of respondents in the survey who described the environment as positive was up in North America, Asia Pacific, Middle East & North Africa and Europe.

With the increased liquidity of debt markets in North America and the resulting impact this may have globally, as well as signs of positive economic developments in Europe and sustained high growth rates across the Asia Pacific region, there appears to be concrete supporting evidence underpinning these early signs of returning confidence.


However, while there is increased general positivity around fundraising prospects, there is also a recognition that the process has become costlier and more onerous and many firms are having to adapt their strategy to improve their chances of a successful fundraise.

This is happening, in part, through the increased use of alternative fund structures as LPs explore options beyond the traditional model of a 10-year life blind pool fund. One such alternative structure is deal-by-deal, whereby investors are presented investment opportunities and can either opt in or out on a case-by-case basis. Such deal-by-deal structures are often structured as fund-lites (bespoke limited partnerships formed for pre-identified deals).

Benefits to GPs:

• Can be used by first-time managers to provide a base from which to build a track record and may act as a bridge to larger pools of committed capital.

• Can be used by larger more established managers looking to create a bridge until their next fundraise or to make a one-off investment outside their fund’s investment parameters.

• Carried interest is on a deal by deal basis (with no escrow or clawback) as opposed to ‘fund as a whole’.

• The manager is generally permitted to raise successive funds.

Benefits to LPs:

• Fund-lites typically have durations of three to six years compared to ten years for a typical blind pool fund – investors benefit from having their funds tied up for a shorter period of time.

• The fund investor will know from the outset the identity of the target that the fund will be investing in.

• Management fees are normally only charged on drawn capital rather than committed capital.

What can GPs expect from a fund-lite?

• The opportunity to create a track record.

• To cement investor relationships.

• To enjoy benefits of the deal-by-deal carry.

What is the process for setting up a Fund-lite?

• Dependent on tax requirements, but the manager will generally prefer a limited partnership structure and an investor will prefer a corporate structure.

• If a partnership structure, carried interest will still be routed through a carry partnership.


Although the private equity industry appears to be rebounding strongly from the 2008-09 financial crisis, numerous challenges facing the industry remain and, in order to succeed, funds must be adaptable and tailor their approach to meet the requirements of investors in an evolving landscape.

The fund-lite model offers an innovative solution to the growing demands of investors for prior sight of investments, as well as providing new manager teams with the means to raise money for the first time in an environment where track record is significant. For both managers and investors, a fund-lite offers flexibility and cost savings.

Eamon Devlin is the managing partner at MJ Hudson, a law firm focused on alternative asset markets.