The conventions
US private fund terms have converged around a recognisable set. Management fees on committed capital during the investment period, stepping to invested capital after. A preferred return before carried interest. A carry percentage that varies by strategy. A catch-up whose rate is negotiated. Clawback with an escrow or guarantee behind it.
None of this is statutory. It is what the institutional investor base has settled on, enforced by the fact that a term far outside it prompts questions the sponsor would rather not spend credibility answering.
Where negotiation actually happens
Distribution waterfall. Whether carry is calculated deal-by-deal or on a whole-of-fund basis is the single most consequential economic term and it is negotiated. European-style whole-fund waterfalls have become more common in US funds than they once were.
Fee offsets. The percentage of transaction, monitoring, and director fees offset against management fee. Full offset is now common in several strategies.
Expense allocation. What the fund bears versus the manager, particularly on broken deal costs, technology, and compliance. This has received regulatory attention and disclosure is expected to be specific.
Key person and removal. What triggers a suspension, and what majority can remove the manager with or without cause. First-time managers are held to tighter provisions.
GP commitment. The size and, importantly, whether it is funded in cash rather than through fee waiver.
Side letters
Large investors obtain side letters: most favoured nation rights, co-investment priority, reporting requirements, excuse rights for specific investments, and transfer provisions. The aggregate effect of a side letter book is material and needs to be tracked, because MFN rights make one concession several.
For a first fund
- Expect an anchor investor to seek economics for the commitment; decide in advance what you will give
- Assume tighter key person, governance, and GP commitment terms than an established manager would accept
- Get expense allocation policy precise before the first close; amending it later is harder than writing it correctly
- Budget the fundraise at twelve to twenty-four months and fund the management company accordingly
- Treat the industry reporting standards as the baseline; investors increasingly require them
