Davis Polk partner Michael Hong was quoted in Buyouts discussing deal fee offsets in limited partner agreements. Michael noted that the reason GPs started applying the offset only to the fund’s portion of the equity is because they saw LPs receiving the “windfall,” and that the debate over the offsets has been going on for a decade.

“When I started introducing it [into fund documents] a decade ago, there was minimal to little pushback,” Michael said. Even today, he observed that out of 20 or 30 LPs he negotiates with on fund terms, only one or two of them push back on the arrangement.

GPs have a “fairly rational, logical argument,” he continued. “The offset should be commensurate with the reduction in value you’re suffering from the extraction of the fee, that’s why it’s done based on the fund’s proportionate ownership of the company.”

Now, LPs are in a position to push back on certain fund terms. “The terms negotiations have been decidedly LP-friendly at a scale I don’t really think I’ve ever seen before,” Michael said. “It’s a very emboldened community. Certain LPs see an opportunity to reset certain terms and they are taking advantage.”

“Deal fee offsets and the rise of LP power in negotiations,” Buyouts (July 26, 2024) (subscription required)

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