Current developments on contractual terms for private equity funds

On the way to a two-tier society - this is how the international private equity market can be summarized if one reviews the last 12 to 18 months of international fundraisings of private equity funds. In the English trade press, there has recently been increasing talk of a division of fund managers into the few haves versus a large number of have nots. This is something to keep in mind when reading about new records in fundraising. Against this background, it is worth taking a look at current trends in the contractual terms (fund terms) of private equity funds (PE funds) and other closed-end alternative investment funds for institutional investors.

The current fundraising situation is characterized by a very competitive effort by fund managers to attract institutional investors. This courting of investors has recently translated into positive fundraising numbers. Demand for private equity, an asset class that promises superior returns, is high in the current low interest rate environment. If you first take a step back and look at the other environment of fundraising, you are almost amazed that fundraising figures have recently developed very well and in some cases old records have been exceeded.

Fundraising environment and figures

The fundraising environment is a source of concern for many fund managers: political, economic, tax and regulatory. This is because, politically speaking, the global turmoil of the past year has become even more acute. It ranges from the recent Brexit decision as the last spectacular highlight of the EU and euro crisis, which has now lasted for years, to the smoldering political conflict with Russia and the refugee crisis, to the U.S. presidential election campaign between Hillary Clinton and Donald Trump. The topic of taxes also continues to be a hot topic. The keywords BEPS, FATCA/ CRS, Investment Tax Reform Act, management fee turnover taxation and global pressure on carried interest taxation illustrate that the tax merry-go-round continues to spin.

Important regulatory aspects for managers and investors remain insufficiently clarified and are being tightened by new requirements. In addition to ongoing legislative changes and plans (EU Capital Markets Union, AIFM Directive II, Market Abuse Regulation, MiFID II), the issue of enforcement, i.e. the enforcement of existing laws by supervisory authorities, is also straining the nerves of fund managers. Recently, U.S. fund managers in particular have been subject to tighter controls by the SEC. However, there were also a few bright spots. For example, the regulatory relief for loan funds provided by the UCITS V Implementation Act and BaFin practice is encouraging. In addition, the economic environment with high market volatility on the stock exchanges, low commodity prices, low interest rates and quantitative easing by central banks, as well as the downgrading of the valuation of unlisted "unicorns" in the USA, has clouded the situation to some extent.