News & Analysis

More US managers offering whole of fund carry

Fund terms research also shows average GP commitments are falling, but hurdle rates and carry are generally unchanged

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An increasing number of US fund managers have adopted a European-style waterfall structure over the past year and now offer whole-of-fund carry to investors, according to research by alternative asset consultancy MJ Hudson.

Just over one-third of the US funds in the firm’s sample have adopted this approach, up from 20 percent in 2016. In Europe, 88 percent of funds reported whole-of-fund carry, reversing last year’s trend, when 33 percent of the continent’s funds offered deal-by-deal carry.

“Deal-by-deal carry still predominates [in the US] but less than in 2016 [which] indicates continuing LP pressure on US funds to have European-style waterfalls,” the report said.

The majority of the funds in the sample, 93 percent, had an 8 percent hurdle rate, while the rest had no hurdle.

Twenty percent carried interest remains the norm, although a small number of GPs are offering alternatives. These include handful of instances of “super-carry” – a higher level of carry negotiated by some top GPs – and ratchet-based carry, which gives GPs a higher carry percentage when the fund achieves a certain cash multiple.

“The new variants suggest that carried interest, properly designed, is a formidable tool to align incentives between the GP and its LPs,” the report said.

MJ Hudson said it was difficult to gauge the true level of fees because of the growth in side deals and management fee discounts. But its data showed just under two-thirds of the surveyed funds charge a 2 percent management fee. After the investment period, most funds HOW MANY? apply the same management fee rate to the capital invested.

Many sampled funds step down the fee, temporarily or permanently, if there is a key person event or an unauthorised change of control during the investment period. Some of them also drop the rate when a succeeding fund’s fees kick in.

The data was drawn from MJ Hudson LP Unit’s review of key economic terms across a representative sample of private equity funds that came to market in the 12 months from April 2016.