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6 Ideas for Innovating Private Equity Fund Terms

“Some of the provisions, because they’re so outdated, are not incentivizing sponsors to do the best job that they can for LPs on a risk-adjusted basis.”

Aligning the interests of General Partners (GPs) and Limited Partners (LPs) is an essential component of successful private equity funds. Efficient fund terms help GPs and LPs focus on achieving common goals and maximizing returns.

But in recent years, it’s become harder to keep the interests of GPs and LPs in sync. As market forces have shifted, fund terms have remained largely static. A low-interest rate environment coupled with a growing number of funds that invest in industries with longer time horizons has frequently rendered the current fund model outdated.

“Some of the provisions, because they’re so outdated, are not incentivizing sponsors to do the best job that they can for LPs on a risk-adjusted basis,” said V&E Investment Management partner Emily Stephens.

“There is room for innovation,” added V&E partner Robert Seber, who leads the firm’s Investment Management practice. “The objective is not to move the needle in favor of either GPs or LPs. The real objective is to improve alignment.”

Seber and Stephens recently outlined six ideas for updating private equity fund terms. While these ideas are not necessarily applicable to all types of PE funds, sponsors should consider them as they engage in fund formation.