Five Questions With Marco Masotti, Partner, Paul, Weiss, Rifkind, Wharton & Garrison LLP:
How has the fundraising environment been from a lawyer’s perspective?
We are seeing a market with a lot of mega funds in the middle of their fundraising process and a number of emerging managers competing for sizeable allocations capital. It is as busy as it’s ever been from a legal perspective, not only because investors are making commitments, but it’s a more mature market, so investors are negotiating terms, doing the due diligence and, overall, making the fundraising process more intense and time consuming. That’s a change from ’99 when there was also a great deal of commitments.
What are you seeing for fund terms?
The current market seems to involve a balanced relationship between the LPs and GPs. General partners are still getting the core economics: the 20% carried interest, the management fee in a range of 1.5% to 2.5 percent. And the LPs are getting some of the governance and transparency rights they wanted, such as key-person terms, no-fault divorces and GP removal for cause’ provisions… There are a number of factors that go into the scale of the fees: the size of the team, size of the fund, the experience of the professionals, but as a general matter, I do not think people try to go out and really push the envelope on fees. They want to be in the middle of the market. For a buyout fund it’s 1.5% to 2 percent.
Are there any sticking points that you’re coming across with regard to fund terms?
As GPs are generally getting the fees and the carry that they covet, the place where there’s more negotiation is at the edges of the economics-the transaction fees and expenses borne by the fund.
Managers are also allowed to take a portion of transaction fees, but there is often a negotiation over how much the manager gets to keep of those fees. As a general matter, a number of years ago, 50% went to the manager and 50% went toward reducing the management fee dollar for dollar. Now there’s more of a negotiation on this point and LPs are seeking that 80% to 100% go toward the reduction of the management fee.
Awhile back there was a lot of talk about how the Patriot Act, and its anti-money laundering provisions, would affect fund-raising. Has this been the case?
The proposed rules under the Patriot Act that would apply to private equity firms have not yet been adopted; however, many firms are acting as though it does apply. Most GPs are including representations on anti-money laundering in the fund documentation and are requiring back-up documentation from investors, and it has made the GP get to know its investors a little better, which from a credit matter is a good thing.
Transparency has been an issue for the past couple years. How has this been handled when negotiating fund terms?
Generally, LPs want more transparency and for the most part GPs are getting better at providing that information, technologically or otherwise. Many firms are providing Web-based access to investors. Some investors are asking GPs if they can provide information on their Web sites in terms of IRRs. Some GPs are limiting the types of information to LPs that can be exposed under FOIA-type requests. Overall, though, my sense is that GPs are coming to terms with providing disclosure as it relates to fund- level information.