Giving economic benefits to investors

Return on investment is often the very first reason an investor chooses to put their money in a fund. He trusts someone more experienced than him to make better decisions than he would have made on his own. However, this person, the fund manager, necessarily has a cost. The investor would not have had to bear this cost if he had invested alone. He must therefore convince himself that this cost is not higher than the added value of investing with the manager.

The best managers are, as a rule, the most expensive. Beyond the payment due to the manager, the simple operation of the fund also has a cost. The manager can convince investors by lowering these two cost lines as much as possible.

Negotiating management fees in private equity funds is a complex process: it is important to understand the nuances of calculating management fees and how they can be negotiated.

In principle, the management commission, i.e. the sum allocated to the manager for his services, corresponds to:

· 2% per year on the amounts committed during the investment period; and

· 2% per year on the amounts invested after the investment period.

Management fees at 1% per year of the amounts incurred throughout the life of the fund. They cover fund management costs, such as administrative and legal costs, etc.

All the money going to management fees and fund costs will not go to investment: the sums invested, which are productive, will be reduced accordingly. Between the costs of the fund and the management commission, these costs can reach 25% or more of the sums committed over a lifespan of 10 years. This high amount may put off some investors.

Gurantee of a ceilling

The manager can therefore guarantee a ceiling on this amount. This ceiling could be between 10 and 20% in order to reassure investors of less loss of money in the investment process. Once the ceiling has been reached, the manager must bear the expenses of the vehicle and his own expenses.

If the cost of a general ceiling seems too high, it may be granted only to certain investors. The manager must then dive into precise calculations: if X invests 1M€ and his ceiling is 15%, no more than 150k can be invoiced to him, while he can invoice more to other investors.

Otherwise, investors can discuss the amount of the management fee. Instead of paying 2% per year, the investor will only pay 1.90 or less. This reduction in the amount of the commission can be justified by a greater commitment from the investor. If his investment passes a bar defined by the manager, he will benefit from the advantage.

When negotiating management fees, there are a few key factors to consider. First, it is important to understand the motivations of the fund manager. Is he looking for a long-term relationship or is he looking for a quick return? He must learn to sacrifice part of the commissions to maintain a long-term relationship, accepting that the fees increase on the following funds.

Next, it is important to consider the track record of the fund. A fund with a good track record is likely to charge higher management fees than a fund with a less impressive track record. It is also important to consider the size of the fund. Investors in larger funds generally have more bargaining power and can take advantage of this size to negotiate more favorable terms. Small managers have less leeway, because their budget is tighter.

Finally, it is important to understand the fund's investment strategy. Different strategies require different levels of management, which can influence the fees charged. For example, a fund that focuses on high-risk investments may require a higher level of management than a more conservatively managed fund, because the manager must steer each investment more precisely.

Offering shares of carry

Another financial advantage to offer to the investor would be to give him shares of carry on the fund. Unlike the other benefits, this one depends on the performance of the fund. The investor would have no gain in the event of underperformance. In case of performance, the incentive can be very interesting.

Managers therefore have several financial levers to attract their investors: negotiate individually or collectively, ceilings or reductions. They can work on a step-by-step strategy to encourage their investors to put bigger tickets in their vehicles. The manager can even consider reducing his carry to convince his investors.

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