Continuation fund economics under pressure in buyer-friendly market – Proskauer

Lead buyers in some recent transactions have been able to negotiate a less than 1% management fee, according to a paper from Proskauer.

Buyers have been able to whittle down continuation fund management fees as the pendulum of power swings in their favour.

Lead buyers in some recent transactions have been able to negotiate a less than 1 percent management fee, according to a recent paper authored by Nigel van Zyl, co-head of Proskauer’s private funds group, and private funds partner Warren Allan. This trend has been particularly evident in single-asset transactions, including those involving “in-demand” assets.

In one recent European transaction, buyers secured a management fee that was almost 25 basis points lower for lead investors and those who made commitments above a certain threshold, the paper said.

Buyers have gained leverage in GP-led transactions over the past year amid heightened competition for these transactions, Allan told Secondaries Investor. One consequence has been downward pressure on management fees, he noted.

Some lead investors were “successfully negotiating management fee discounts and otherwise volume discounts being offered for continuation fund investors making larger commitments”, Allan added.

Proskauer has not seen alterations to other terms such as carry and hurdle, he said, noting that “super carry seems to have gone away at the moment”.

Buyers are “being insistent on the level of carry or any cash off the table from the GP; it just gets rolled into the new deal, which goes to alignment… I think that’s the key focus of a number of buyers at the moment, rather than seeking specific special deals on carry as things stand”, Allan noted.

It’s too early to know whether this year’s discounted management fees will have an impact on market norms over the long term. However, if the pendulum swings back in favour of sellers, Allan anticipates the commercial dynamics in high-quality transactions will result in terms in line with what was seen before 2022.

“If, for example, there’s a very oversubscribed opportunity… then a GP clearly is going to be able to achieve better terms where the kind of discounts or lower management fees wouldn’t be necessary to be offered.”