Preqin Press Release ILPA Principles Adherence

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Press Release Immediate Release 9th August 2010

Mixed Results Regarding PE Funds Adherence to ILPA PrinciplesUS Firms Resist Change to Whole Fund Carry Structure

71% of LPs Surveyed Would View Non-Adherence to Principles as a Reason Not to Invest in a Fund

Preqin has assessed how closely recent private equity funds are adhering to a selection of quantifiable ILPA best practicesfollowing the release of ILPAs Private Equity Principles in September 2009. The analysis was performed using extensive data onfund terms and conditions taken from the 2010 Preqin Fund Terms Advisor publication. (www.preqin.com/fta)

ILPAs Principles call for an all-contributions-plus-preferred-return-back-first model. Preqins review of the most recent fund PPMsreveals that the vast majority of funds outside of North America do adhere to this Principle, with 88% of European funds with a2009/2010 vintage or still fundraising using a whole fund carry structure, and 85% of recent Asia and Rest of World-focused fundsalso doing so. In North America however, only 48% of recent funds use a whole fund structure and 47% are still using a deal-by-deal structure.

Other ILPA Principles are followed more closely; for example, 97% of recent funds reduce their management fee after theinvestment period through a variety of different methods. ILPA calls for a significant step down in fees, and some funds make

more significant reductions than others. For example, 61% of recent buyout funds use the same percentage rate, but apply this onlyto invested capital, while 25% go further, reducing the rate and applying it only to invested capital.

Other Key Facts:

In a recent Preqin survey of 50 leading institutional investors, 13% of LPs said they would dismiss an opportunity to investin a fund based solely on its non-adherence to the Principles, and a further 58% said that they would see this as apotential reason to not invest.

ILPAs Principles state that all transaction, monitoring, directory, advisory, and exit feesshould accrue 100% to thebenefit of the fund. There has been considerable movement in recent years towards the GPs rebating to funds the feesthey charge portfolio companies, and 39% of recent funds rebate 100% of these fees. However, most GPs still retain aproportion of such fees, with 28% of GPs rebating 80% of fees to the funds, and 26% of GPs rebating on 50-59%.

The Principles call for no-fault divorce rights upon the vote of two-thirds in interest of LPs. However, less than 4% of fundscomply with this Principle, and the most common LP supermajority required is 80%, the threshold used by 58% of recentfunds.

A substantial contribution by GPs to their own funds is another area detailed in ILPAs Principles. Two-thirds of recentfunds have GP contributions above 1%, which is seen as the historical standard, demonstrating that this is another areathat has seen movement by GPs.

Please see research report following this release for further details of findingsComment:Fundraising remains a challenging prospect at present, and the balance of fund terms negotiating power has swung towards LPs.With 130 organizations already endorsing ILPAs Principles, it is important for private equity firms to be aware of these bestpractices and to have considered them when assembling PPMs. While some areas of the Principles are being followed, otherareas do not enjoy such widespread support, with the continued prevalence of deal-by-deal carry structures in the US a notablearea where GPs continue to resist change. The majority of investors in Preqins recent survey would see non-adherence to thePrinciples as a reason to not invest in a fund, so it is important that managers with non-best practice terms are able tocommunicate why this is to an increasingly terms and conditions-sensitive LP community.Sam Meakin, Managing Editor of the 2010 Preqin Fund Terms Advisor

*Ends*_______________________________________________________________________________________________________About Preqin:Preqin is the leading source of information for the alternative assets industry, providing data and analysis via online databases,publications and bespoke data requests.

Preqin has built a reputation in the alternative assets industry for providing the most comprehensive and extensive informationpossible. Leading alternative assets professionals from around the world rely on Preqins services daily, and its data and statisticsare regularly quoted by the financial press. For more information, please visit: www.preqin.com

Note to Editors:

Please note that Preqin has completely replaced Private Equity Intelligence as the official company name.

Preqin is spelled without the letter U after the Q.

For more information, please contact:

Tim Friedman on +44(0)20 7065 5180 or [email protected]


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Preqin Special Report:

Terms and Conditions:Are the ILPA Principles Being Followed?August 2010


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2010 Preqin Ltd. / www.preqin.com 2

Following extensive discussion, surveying and roundtable

meetings, the Institutional Limited Partners Association (ILPA)

released its best practise guide to private equity fund terms

and conditions, the Private Equity Principles, in September

of 2009. ILPA currently has 130 organizations endorsing thepractices outlined in the document.

The stated aim of the Principles is to serve as a common

framework for continued discussion among and between the

general partner and limited partner communities with the goal of

improving the private equity industry for the long-term benefit of all

its participants.

Using Preqins extensive data on terms and conditions taken from

the newly released 2010 Preqin Fund Terms Advisor publication, it

is possible to assess the level to which new funds are adhering to

a selection of quantifi

able ILPA best practices.

Deal by Deal Vs. Whole Fund Carry

ILPA: A standard all-contributions-plus-preferred-return-back-first

model should be recognized as best practice.

Preqin:62% of funds closed in 2009, 2010 and currently raising

utilize a whole fund structure

Although the majority of funds are adhering to a whole fund carry

structure, 38% continue to work on a deal-by-deal basis. Within

Europe, whole fund structures are the norm, with only 7% of recent

vehicles focusing on the region using a deal-by-deal structure.

Within North America, nearly half of all recent funds are still

distributing proceeds on a deal by deal basis, as Fig. 1 shows.

Similar to European funds, the vast majority of Asia and Rest of

World-focused funds have a whole fund structure, with just 11% of

recent funds utilizing a deal-by-deal structure.

Management Fees Post-Investment Period

ILPA:Management fees should step down significantly upon the

formation of a follow-on fund and at the end of the investment

period.

Preqin:Only 3% of funds maintain the original management fees

upon the completion of the investment period.

This is an area where the vast majority of fund managers are

adhering to the Principles, although there is a wide range of

different methods used for reducing fees, with the savings for LPs

varying considerably. For buyout funds, 99% of funds will reducethe fees, but 61% still charge the same rate applied only to the

invested capital. 25% of buyout funds go further, reducing the rate

and applying to invested capital only, as Fig. 2 shows.

Transaction and Monitoring Fees

ILPA:All transaction, monitoring, directory, advisory, and exit fees

charged by the general partner should accrue 100% to the benefit

of the fund.

Preqin:39% of the most recent funds rebate 100% of such fees

back to the fund.


47%

7% 11%

48%

88% 85%

5% 5% 4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

NorthAmerica

Europe As ia &ROW

Other

Whole Fund

Deal-by-Deal

Fig. 1: Basis for Distribution of Fund Proceeds by PrimaryGeographic Focus of Fund

(Funds Raising & Vintage 2009/2010 Funds Closed)

Proportion

ofFunds

Source Preqin

Fig. 2: Buyout Funds - Mechanisms for Reducing ManagementFee after Investment Period

(Funds Raising & Vintage 2009/2010 Funds Closed)

Source Preqin


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2010 Preqin Ltd. / www.preqin.com 3

There has been considerable movement towards rebating fees

to the fund in recent years, but the majority of funds still retain

a proportion of such fees for the GP. As Fig. 3 shows, just 1% of

recent vehicles rebate less than 50% of transaction fees, but a

considerable 26% rebate only 50-59%, while 28% rebate 80% ofsuch fees.

No-Fault Divorce Clause

ILPA:No fault rights upon a two-thirds in interest vote of limited

partners for the following: Removal of the general partner;

Dissolution of the Fund.

Preqin:Less than 4% of the most recent funds comply with this

statement. 80% in interest is the most common supermajority.

Although only a small minority of funds set the supermajority

as low as the 67% identified by ILPA, it is now commonplace to

have a no-fault divorce clause in place. 58% of funds set an 80%supermajority, while 34% require a 70-79% supermajority, as Fig.

4 shows.

GP Contributions

ILPA: The general partner should have a substantial equity

interest in the fund to maintain a strong alignment of interest with

the limited partners.

Preqin:39% of funds have a GP contribution of 1-1.99%. 22%

of funds have a GP contribution of 2-2.99%. 10% of funds have a

GP contribution of 5-5.99%; 14% have a GP contribution of 10%

or more.

A GP making a substantial commitment to their own vehicle is anexcellent way to align interests in the GP LP relationship, and

has been noted by placement agents as one of the best ways that

GPs can make a statement of intent when seeking commitments

for new vehicles in the current market. 31% of recent funds have

a GP commitment of the historical standard of 1%, but 67% of the

most recent funds have above 1% GP commitment levels, and

14% of new vehicles have GP contributions of 10% or higher, as

shown in Fig. 5.

Summary

With investors having significantly less capital to deploy into

new vehicles than in previous years, and with a large number of


1%

26%

3% 3%

28%

0%

39%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

< 50% 50-59% 60-69% 70-79% 80-89% 90-99% 100%

Fig. 3: Share of Transaction Fees Rebated to LPs(Funds Raising & Vintage 2009/2010 Funds Closed)

Proportion

ofFunds

Share of Transaction Fees Rebated to LPs Source Preqin

4%

34%

58%

4%

0%

10%

20%

30%

40%

50%

60%

70%

60-69% 70-79% 80-89% 90% +

Fig. 4: LP Supermajority Required for No-Fault Divorce Clause(Funds Raising & Vintage 2009/2010 Funds Closed)

Proportion

ofFunds

LP Supermajority Required Source Preqin

2%

39%

22%

5% 4%

10%

1% 1% 1% 0%

8%

1% 2% 3%

0%5%

10%15%20%25%30%35%40%45%

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Preqin Press Release ILPA Principles Adherence