Investment Funds Observations 2017 - Part Seven

From our vantage point as advisers to many of the world’s top private equity houses, broad market forces flow through to our instructions, and ultimately drive many of the terms of the funds we advise.

In this series we take a look at what we have been seeing in the investment funds world. Part seven will focus on private equity funds.

Fees

20% remains by far the most common carried interest percentage, typically arising after a preferred return hurdle of 8% has been passed.

PE Carry Entitlement

Fund-as-a-whole waterfalls continue to outnumber their deal-by-deal counterparts, with investors insisting on whole fund performance before allowing for payment of performance allocations.

The stated range of management fees continues to be a little broader, with some deviation from the historical 2% standard.

PE Mnagement Fee

In general however fee terms remain subject to side letter provisions, with certain institutional limited partners enjoying some success in negotiating fee breaks on both carried interest and management fees (albeit this is less prevalent than in the hedge fund sector).

Cayman LLCs

The final word goes to Cayman Islands limited liability companies, introduced in Cayman for the first time pursuant to The Limited Liability Companies Law, 2016. Cayman LLCs are designed to be as similar as possible to their counterparts in Delaware, with which onshore counsel are very familiar. Whilst currently most commonly used for general partner entities, downstream portfolio holding companies and joint venture vehicles, tax consideration allowing, there is also scope for Cayman LLCs to be used as private equity and hedge fund vehicles, typically where external concerns demand a vehicle with separate legal personality. In any such situation the limited liability company agreement governing a Cayman LLC offers materially more flexibility, akin to that offered by the partnership agreement of an exempted limited partnership, than the articles of association of a Cayman Islands exempted company.

We have not as yet seen any private equity fund vehicles structured as Cayman LLCs and we do not expect this to be a significant trend. However, we now routinely see funds formed with Cayman LLCs as their general partner, or with general partners in existing fund structures being replaced by, or converted into, Cayman LLCs. Managers may be seeking to either move their fund structures entirely to Cayman by swapping out existing Delaware LLC general partners, or to replace Cayman exempted company general partners with LLCs offering greater flexibility with regards to governance structures, fiduciary duties and the allocation of carried interest amongst individual managers