Headline vs. reality

In 2005, limited partners were clearly eager to commit capital to private equity funds but expressed concern over key terms and conditions in limited partnership agreements. Such terms and conditions vary greatly between firms, according to a recent study by Private Equity Intelligence. These variations can significantly impact the total costs to LPs over a fund's life, as well as influence the GP-LP alignment of interest. Despite LP pushback, fund terms continue to lean toward what might be termed ?GP friendly.?

The study compared the difference between a fund's stated, or ?headline? management fee with ?actual? fees and costs. The results show, for example, that a headline management fee of 1.5 percent actually averages out to 2.7 percent over a fund's life, when fees as a percentage of invested capital are factored in from the early years. (Fig. 1)

In a survey of 600+ funds over 2000 to 2005, the actual management fees and costs incurred by LPs ranged widely. (Fig. 2)

Actual fees and costs incurred by LPs in 2004 on a sample of 209 buyout funds from vintages 1994 to 2003 show lower costs for funds of pre-1999 vintage, with newer funds raised in 2001 to 2003 ?a tough period for GP fundraising ?showing management fees more favorable to LPs. The situation has reversed for 2005 vintage funds (not shown). (Fig. 3)