The Economic Value of Terms and Conditions

Abstract

Limited partners investing in private equity funds often negotiate partnership terms and conditions without a clear understanding of the relative value of each individual decision. Possessing such knowledge would allow the limited partner to decide which terms may be used as bargaining chips and which are most worth fighting for. In this article the author quantifies the effect on net returns of some of the most common terms used in the private equity industry. His analysis has revealed some interesting and counterintuitive results. Under typical industry terms and conditions, we find that the expected fees and carried interest paid to general partners totals $71 million over the life of a $100 million fund, generous compensation compared to that of managers of more efficient asset classes. However, we find that over the years partnership terms have evolved significantly in favor of limited partners compared to their starting point.