TheTM October issue of Private Equity Manager is all about terms and conditions, a topic that causes yawns when everything is going well but becomes the subject of intense scrutiny when a partnership hits a bump.
We're certain our readers are a far-sighted, thoughtful bunch, and so this month's topic should be of great interest to them, even though things are pretty rosy right now in private equity. Smart private equity investors know that one must exercise greater discipline amidst a party-like atmosphere, not less.
Rather than join in the endless search for ?market? terms in the limited partnership agreement, we thought we'd highlight a few outliers and examine the context in which they were agreed . Starting on p. 20, you'll find some examples of partnership terms that are proudly off-market. In two cases, the LPs agreed to these terms; in one case, the GP is about to find out if a fairly radical new concept for carried interest is accepted by the market (the odds are made all the longer because the fund is focused on China); another GP is testing LPs' appetite, for a new venture model. Finally, we examine a fund of funds that just didn't fly, in part because it included an unorthodox method of assessing the management fee. Sadly, the GPs in this case took too seriously LP complaints that they wanted fresh ideas on management fees. As real estate agents sometimes say, ?Buyers are liars.?
Some terms are negotiated, and other terms are merely observed by the LP community, silently judged, and the GP only finds through the vote of dollars what the group verdict was. No better example of this exists than the GP commitment, a litmus test of devotion to the fund's strategy. Generally speaking, LPs want to see a GP open his wallet, mortgage his house and sink it all in the fund. But newer firms are often managed by GPs who don't have millions to invest. How do LPs judge these situations? Rob Kotecki reports on the numbers and human angles to this issue on p. 24.
Speaking of new private equity firms, don't miss next month's issue of PEM – we study the real-world costs of launching a private equity firm, as well as the consequences of having a ?sugar-daddy? in the process. It takes money to make money, but there are better strategies than others for getting to the all-important first close.
Enjoy the issue,