Securities

Front 1

What is a "clawback" provision applied to the general partner of a private equity fund?

Back 1

A clawback obligation represents the general partner’s promise that, over the life of the fund, the managers will not receive a greater share of the fund’s distributions than they bargained for. Generally, this means that the general partner may not keep distributions representing more than a specified percentage (e.g., 20%) of the fund’s cumulative profits, if any. When triggered, the clawback will require that the general partner return to the fund’s limited partners an amount equal to what is determined to be "excess" distributions.

Front 2

How is general partner of a private equity fund generally compensated?

Back 2

General partners are typically compensated with a combination of a management fee (defined as a percentage of the fund's total equity capital), monitoring fees (fees paid to the general partner by portfolio companies for services), as well as transaction fees (fees paid to the general partner in their M&A advisory capacity). In addition, the general partner usually is entitled to "carried interest", effectively a performance fee, based on the profits generated by the fund. Typically, the general partner will receive an annual management fee of 1% to 2% of committed capital and carried interest of 20% of profits above some target rate of return, which is typically 8% to 10% (called "hurdle rate"). Gross private equity returns may be in excess of 20% per year, which in the case of leveraged buyout firms is primarily due to increasing levels of leverage in the portfolio companies, and otherwise due to the high level of risk associated with early stage investments. Although there is a limited market for limited partnership interests, such interests are not as freely tradeable like mutual fund interests.

Front 3

What is the "carry interest" payment for a general partner of a private equity fund?

Back 3

The portion of any gains realized by the fund to which the fund managers are entitled, generally without having to contribute capital to the fund. Carried interest payments are customary in the venture capital industry, in order to create a significant economic incentive for venture capital fund managers to achieve capital gains. Most splits 80 / 20 split.
In addition, the general partner usually is entitled to "carried interest", effectively a performance fee, based on the profits generated by the fund. Typically, the general partner will receive an annual management fee of 1% to 2% of committed capital and carried interest of 20% of profits above some target rate of return, which is typically 8% to 10% (called "hurdle rate").

Front 4

What are private equity "side letters"?

Back 4

Equity Side Letters. For those who do not subscribe and cannot follow the link, a private equity side letter is a letter written by a GP to a special LP outlining the special deal or agreement between the two. This letter usually goes to a handful of LPs that the GP wants to specially favor because the LP is a notable investor, the largest investor, or someone with deep connections that adds value to the fund other than money. Typically, a side letter is not that big of a deal because the Partnership Agreement usually already states that the GP may waive fees or carry at its discretion. That is usually understood to affect the loyal investors and friends of GPs, and that other LPs should not worry about it

Front 5

What are private equity "club deals"?

Back 5

o Club deals are where two or more (usually three or four) equity funds get together to make a bid for (and hopefully take over) a company. This is most common on large deals, where no single investor has the resources to buy the target on its own or may be restricted from doing so by its investment policies, and for strategic reasons where a trade investor which has the expertise to run the target teams up with financial investors which provide part of the equity finance. The infrastructure sector is currently seeing a raft of strategic club deals backed by financial investors. The teaming of private equity firms on a single deal is nothing new in the publishing industry, but “club deals,” as they’re sometimes called, are getting larger and becoming more frequent as evidenced in the recent $10 billion acquisition of VNU by a consortium of six PE firms and the partnership of Wasserstein & Co. and MidOcean Partners on the $530 million Penton Media deal.

Front 6

What is a "Catch Up" provision for a general partner of a private equity fund?

Back 6

o Catch Up. This is a common term of the private equity partnership agreement. Once the general partner provides its limited partners with their preferred return, if any, it then typically enters a catch-up period in which it receives the majority or all of the profits until the agreed upon profit-split, as determined by the carried interest, is reached.