Inflection Points in Negotiating PE Fund Core Economic Terms and Structuring GP‑Entity Carry Allocations to Incentivize Employees

Fund economics are a significant part of negotiations between sponsors and prospective investors in new PE fund launches. Almost as important as the economics themselves, however, are how the provisions are drafted in the fund documents and whether certain LP protections are included (i.e., clawbacks and escrow accounts). Ambiguity or obstacles in GPs receiving carry distributions on that basis can trickle down into potential issues with subsequent payments to retain talented employees. In addition, sponsors need to be mindful of ways the GP vehicle can be structured to incentivize employees waiting for carry distributions. Strafford CLE Webinars recently hosted a program examining those and other facets of PE funds’ core economic terms, including how those issues were dealt with in the initial iteration of the model limited partnership agreement released by the Institutional Limited Partners Association. This article summarizes the key takeaways from the presentation, which featured insights from Tremont Street Partners managing partner John J. McDonald and Alston & Bird partner Michael D. Saarinen. For further commentary from Saarinen, see “SEC’s Reg Flex Agenda Promotes Transparency While Adding Potential Compliance Burdens” (Mar. 15, 2018); and “SEC Signals Aggressive Stance on Individual Responsibility, Including Potential CCO Liability, in FY 2017 Annual Report” (Dec. 14, 2017).

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