European Terms, Conditions: A Survey

It’s a competitive private equity world out there, especially for those firms on the fundraising trail or about to embark on a mega fundraising. Have their terms and conditions changed to become more competitive?

Fund targets have certainly come down and become less ambitious. Those firms who raised the mega euro buyout funds in the 2006/2007 fundraising boom such as Apax Partners and Permira, for example, are targeting lower (and some say more realistic) amounts of €9 billion ($11.8 billion) and €6.5 billion respectively.

According to research from European placement agent Acanthus Advisers, the European buyout market (including mega, mid-market and lower mid-market) will be seeking to raise some €130 billion over the next 24 months and the relationship between LPs and GPs remains as challenging as ever. Armando D’Amico, managing partner of Acanthus Advisers, said: “As a huge number of funds are expected to come to market over the next year, chasing scarce capital, the quality of a GP’s communications and relationships will in many cases be a decisive factor.”

Some of the 2006/2007 funds are still only 30 percent invested and fund managers are investing slowly and have even requested extensions of their investment periods, he said.

According to Acanthus’ LP-GP Survey 2011 published at the end of November, there is little agreement on terms and conditions and on the level and quality of communications to investors. Acanthus interviewed senior LP and GP personnel in Europe and the United States, receiving 60 responses of which 33 came from LPs and 27 from GPs. Over three quarters of LPs agreed that GPs should invest more in their own funds in order to promote a greater alignment of interests—just 22 percent of GPs agreed, but there is evidence that their opinion is shifting in line with the LP view, according to the survey.

On a positive note, the research found that only around one in ten LPs and GPs thought the overall relationship was weak, while a majority of LPs (58 percent) believed the IR process had improved over the past year.