Private Equity: Attractive Terms for Outperformers

The proliferation of funds and fundless sponsors pursuing the lower-middle-market (businesses with revenue ranging from $10M to $200M) has caused me to wonder how the preferred rate of return will fare. I am specifically interested as it relates do deals of this scale not only because it is the space I look at most, but also because in this space the sponsor relies more on the “20” in the 2 and 20 model than the “2.” I have personally always thought that it was best to stay small in private equity, and seek multiple arbitrage opportunities, or work for the largest fund you can, and secure stable income. I was surprised to see that in at least one instance, the pref. return for LPs has been removed:

“High-performing GPs have been taking advantage of sterling market conditions to negotiate more favorable terms with LPs. Some have broken convention for hurdle rate, the minimum rate of return for a fund required before the manager begins taking carry. CVC reportedly plans a hurdle rate of 6% for its Fund VII, compared with the industry standard of 8%. Advent International removed the hurdle rate outright from its latest fund, which closed on $13 billion, though that decision was offset somewhat by the fund’s switch to the more LP-friendly European waterfall structure.”

The paper makes clear that this is not the case for PE firms that don’t operate in the “rarified upper atmostphere,” and that continued fund-raising success relies on well-crafted and highly detailed investment strategies:

“As it gets harder to find good deals at the right price and to generate great returns, PE firms that have pulled off that feat—and that are able to communicate succinctly how they use insights from past deals to generate great returns in the future—will have an edge in pulling in capital.”

fund raising private equity
Source: Bain & Company | "Global Private Equity Report 2017" | 02/27/2017 | Visit