Study: 'Early bird' LPs expect to be rewarded

A new survey from law firm Nabarro revealed more than three quarters of real estate investors expect an 'early bird' discount or some other reward for committing before a fund's first close.

Nearly 80 percent of investors polled by law firm Nabarro for a recent study said they had, or would expect to be given a reduced management fee in return for committing before a first close.

In its annual Fund Trends Survey, the firm found large investors in particular expected various concessions in order to out pen to paper.

Some 77.8 percent of investors said they would expect reduced management fees as an inducement to commit to a first close. In addition, 75 percent of investors polled said they would require a guaranteed advisory board membership, and 61.1. percent said they would require approval rights over material decisions.

Next in the order of prerequisites, were rights to co-invest, priority equity drawdown, share of carried interest, opt-in, opt-out rights on investments, rights to approve the identity of subsequent investors, shares in the general partner and seat on the GP board, and lastly, pre-emption over property disposals.

Said Nabarro: “In this tough capital-raising environment, large investors will often expect various concessions if they invest. Our survey results show that reduced management fees, advisory board membership and approval rights over material decisions are most important to investors. Fund managers seem to underestimate the importance to investors of having approval rights over material decisions.” 

“This is much more prevalent in a club than in a fund and investors seeking control over investment decisions are driving the popularity of the club style approach. Interestingly, there is also a mismatch between investors and fund managers over expectations on the opportunity to co-invest in other investment opportunities, with fund managers now seeing this as a standard clause in documentation.”

It added: “Our experience is that those making a significant investment, whether or not on first close, will often benefit from concessions, which can extend to having a seat on the GP board to sharing carried interest, having priority equity drawdowns and opt in/opt out investment rights.”

The study also asked respondents what would make for a successful fund launch. Nabarro said that identifying seed assets was one key takeaway. The other is that follow-on funds were more likely to succeed. Thirdly, a core investment style with no or low gearing was also an ingredient for success. 
“A fund manager with a strong track record and proven management capabilities is a must, and one who will co-invest where appropriate is desirable. Having a cornerstone investor or solid backing from existing investors for a follow-on fund will also drive a successful close,” said the firm.