Study: first close investors expect fee concessions

In its annual fund trends survey, law firm Nabarro says that 77.8 percent of investors require a reduced management fee for committing to a first close of a fund.

Nearly 80 percent of investors polled by Nabarro for a recent study said they had received, or would expect to be given, a reduced management fee in return for committing to a first close.

In its annual Fund Trends Survey, the law firm found large investors in particular expected various concessions in order to put pen to paper. Some 77.8 percent of investors said they would expect reduced management fees as an inducement to commit to a first close. In addition, 75 percent of investors polled said they would require a guaranteed advisory board membership, and 61.1 percent said they would require approval rights over material decisions.

Next in the order of pre-requisites were rights to co-invest, priority equity drawdown, share of carried interest, opt-in/opt-out rights on investments, rights to approve the identity of subsequent investors, shares in the general partner and seat on the GP board and, lastly, pre-emption over property disposals.

“In this tough capital-raising environment, large investors will often expect various concessions if they invest,” Nabarro stated. “Our survey results show that reduced management fees, advisory board membership and approval rights over material decisions are most important to investors.”

Nabarro continued: “Fund managers seem to underestimate the importance to investors of having approval rights over material decisions. This is much more prevalent in a club than in a fund, and investors seeking control over investment decisions are driving the popularity of the club-style approach. Interestingly, there also is a mismatch between investors and fund managers over expectations on the opportunity to co-invest in other investment opportunities, with fund managers now seeing this as a standard clause in documentation.”

It added: “Our experience is that those making a significant investment, whether or not on first close, will often benefit from concessions, which can extend to having a seat on the GP board to sharing carried interest, having priority equity drawdowns and opt-in/opt-out investment rights.”

The study also asked respondents what would make for a successful fund launch. Nabarro said that identifying seed assets was one key takeaway. The other is that follow-on funds were more likely to succeed. Thirdly, a core investment style with no or low gearing also was an ingredient for success.
“A fund manager with a strong track record and proven management capabilities is a must, and one who will co-invest where appropriate is desirable. Having a cornerstone investor or solid backing from existing investors for a follow-on fund will also drive a successful close,” said the firm.