KPS is offering investors in its Special Situations Fund IV, which is targeting $3 billion for control investments in distressed or underperforming manufacturing businesses in the US and Europe, two options for management fee and carry terms.
According to New Jersey State Investment Council documents the first option calls for a 1.75 percent management fee with 25 percent carry, which mirrors the terms of KPS III; the second option offers a 1 percent management fee with a 30 percent carry.
New Jersey, which opted for the latter, approved a $200 million commitment to Fund IV. The commitment will be finalized pending legal due diligence.
Higher carry dollars further incentivize the manager to perform to the best of their ability and not to become as dependent on management fees
“From a risk/reward perspective the amount of management fees saved outweighs the potential increased carry paid in even the best return scenarios,” according to memorandum from Division of Investment director Tim Walsh. “Higher carry dollars further incentivize the manager to perform to the best of their ability and not to become as dependent on management fees.”
The memorandum goes on to mention that KPS had indicated it expects most limited partners to opt for the 1 percent fee/30 percent carry structure, as it poses a better alignment of interest for LPs.
KPS is not the only private equity firm to offer investors a menu of options on carry and fees.
Bain Capital is offering three classes of fees in its latest offering Fund XI: Class A will get 1.5 percent management fee and 20 percent carried interest with a 7 percent preferred return; Class B gets a 1 percent management fee, 30 percent carry with a 7 percent preferred return; and Class C offers a 0.5 percent management fee, 30 percent carry and no preferred return.