Private-equity firms’ efforts to claim profit sooner are leading to growing concerns about the impact on investors.
Carried interest—typically a buyout firm’s 20% claim on the upside of its investments—is usually only accessible to a firm on reaching an 8% return, known as the “hurdle rate.”
Gianluca D’Angelo, a managing director and head of Europe at placement agent Eaton Partners, said the huge sums investors were allocating to private equity would inflate deal values and lead to lower returns. As of the end of last year, private-equity funds globally had $820 billion of committed but uncalled capital, up from $752 billion at the end of 2015.
As well as facing significantly higher deal values as a result of a glut of capital in the market, investors would face even lower returns if they agreed to allow buyout firms to claim carry sooner.
Mr. D’Angelo said: “A better alignment of interests would be to link the hurdle rate and carry split to the ultimate fund performance: In other words, these should be ratcheted up in favor of the GPs only in situations of extreme outperformance.”
30 January 2017 08:13, 1387 words, English, Copyright 2017 Dow Jones & Company, Inc. All Rights Reserved.Back to News