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European Carry Model Dominant Now

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April 30, 2014

A GPs reputation and its track record are still the most important criteria in the minds of LPs selecting a fund manager, but private equity terms and conditions are tipping in favor of LPs, if the latest research from PEI and Schulte Roth & Zabel is anything to go by.

 

The survey found that 80% of funds now use the “European style” whole-of-fund carry model over the “American-style” deal-by-deal model. This European-style model, seen as more investor-friendly, is now dominant.

 

Manager commitments are also important in attracting LPs. Skin in the game, as it is informally referred to, ensures alignment of interests with their investors and to keep staff incentivized, there is no industry-wide agreement on the size of contribution that firms should make to their own funds. The largest proportion of survey respondents said that their firm contributes between 1 and 2.5% of the total fund size. The majority of GPs contribute 2.5% or less of total capital commitments. (See graphic)

 

The survey also revealed that there is a discrepancy between what GPs think the industry standard should be and the size of their current contribution. Twice as many GPs commit more than 5% than those who think that they should, which shows that GPs would prefer to make a smaller commitment than they currently do. (Image source: Fund Formation and Incentives Report PEI)

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