Private Capital Fund Terms

The lesson What Is Private Capital? outlined the basics of the commingled fund structure and introduced the main players involved in the limited partnership – the GP and LP. The terms of the partnership between these two parties is documented in a limited partnership agreement, which outlines key details such as the types of investments to be made, the duration of the fund, and the fees to be awarded to the fund manager. We'll explore their partnership further in this section.

The LP/GP Relationship

When entering into a limited partnership agreement, balance must be struck between the GP and the LP to ensure their interests are aligned on a wide range of issues, from fee levels and transparency to responsible investment. As competition in the fundraising market increases, investors have become more demanding regarding the fund terms they expect to see from private capital fund managers. This has made it more important than ever for GPs to get the balance right in the terms offered to LPs.

As shown in the infographic, terms and conditions can be crucial in an investor’s decision to commit capital to a fund. It is important for GPs to pay attention to the fund terms with LPs, as fund terms have influenced decisions for 85% of investors.

Fund terms can be a source of conflict within the LP/GP relationship, and setting competitive terms can be a tricky task for GPs in private markets. The opaque and confidential nature of private capital investment means that fees are rarely disclosed outside of a fund and, as such, it is difficult to benchmark against other GPs and the wider industry.

This chart shows the main areas in which investors believe the alignment of interests between LPs and GPs could be improved. Perhaps unsurprisingly, fees – and particularly management fees – are one of the most contentious areas across all private capital asset classes. Greater transparency is also high on the list of demands from LPs.

The Rise of Responsible Investing

In recent years, ESG (environmental, social, and corporate governance) has become a more important factor in investment decisions. Preqin’s recent survey showed that nearly half of investors have turned down a fund that did not comply with their ESG program.

Almost a quarter of investors currently have an ESG program in place, and increasing numbers of fund managers are already responding by incorporating ESG principles into their investments. ESG is therefore likely to become one of the most significant topics surrounding fund terms in the coming years. Explore Preqin's ESG insights here.

In this lesson, we delved into the LP/GP relationship, including one of the most important factors for investors – fund terms and their fees. We explored the key terms in depth, covering the costs and processes associated with private capital investments. Finally, we introduced you to ESG, an increasingly prevalent and important topic in today’s investment landscape.