Private Equity Investors Able to Wield an Increasing Degree of Influence during Negotiations of Private Equity Fund Terms

by Helen Kenyon

  • 25 Aug 2009
  • PE

Competition amongst general partners seeking investors for their private equity funds is particularly intense at present: as Preqin’s recent survey of 100 institutional investors showed, more than half have not made any fresh commitments to private equity funds so far this year. There has therefore been much speculation about the effect this situation will have on the balance of power between LPs and GPs during the negotiation of private equity fund terms and conditions. Are GPs now more willing to compromise with LPs on certain terms and conditions in return for commitments?

Preqin has been monitoring shifts in the balance of power between LPs and GPs over recent months by speaking directly with key institutional investors in private equity. Three months ago, evidence for a shift in power towards the LP was already apparent – 27% of respondents to our April 2009 survey of investors told us that they were able to assert a greater degree of influence during negotiations, although 54% of those polled told us that they had seen no change in the balance of power.

However, interestingly, our most recent survey of 100 prominent institutional investors conducted in July 2009 showed us that the shift in the balance of power towards the LP was becoming even more pronounced. More than half, 55%, of respondents to this survey told us that they felt the balance of power had shifted towards LPs when negotiating private equity fund terms and conditions and just 18% reported seeing no evidence of any change.

As a caveat to these statistics, it is important to note that, although there is evidence of a shift in power towards the LP, most investors felt that this change had not been significant. In fact, many told us the change was only pronounced in certain areas of the market, and small- and mid-market funds, and those with top-performing managers, were still able to charge investors a similar rate of fees to previous years.

The complete findings from our investor survey can be found in our research report.

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