Most investors focus on headline returns. The experienced ones focus on the terms. Fee structures, conflicts of interest, and governance provisions in private market fund documentation determine whether manager and investor interests are genuinely aligned or merely appear to be.
This note draws on a term sheet negotiation exercise completed during the Oxford Said Business School Private Markets programme in late 2020, informed by 18 years of vendor and counterparty negotiation at HSBC Alternative Investments.
Having spent years on the operational side of a multi-asset alternative investments platform covering hedge funds, private equity, real estate, and private debt, I have reviewed fund structures from the perspective of someone who has to make them work in practice. Approving product launches from an operational and technology standpoint means seeing how fund terms translate into operational reality: what the documentation promises, what the infrastructure can actually deliver, and where the gap between the two creates risk. That vantage point, sitting across private market strategies rather than within any single one, builds a practical understanding of where documentation protects the investor and where it protects the manager.
The first thing an investor should negotiate is fee transparency. A management fee of 2% on committed capital during the investment period is standard. What matters is what happens after. Does the fee step down? Does it shift from committed to invested capital? A manager charging 2% on committed capital for the full life of the fund is collecting fees on money that may never be deployed. That is a misalignment the investor should not accept without negotiation.
Carried interest is where alignment is either real or theatrical. The standard 20% carry above an 8% preferred return with a full catch-up to the GP sounds balanced until you examine whether the carry is calculated on a deal-by-deal basis or across the whole portfolio. Deal-by-deal carry allows the GP to collect performance fees on winners while the portfolio as a whole may be underwater. A whole-of-fund waterfall, with a clawback provision if the fund underperforms over its life, is the investor's protection. Without it, the GP's incentive is to realise winners early and hold losers indefinitely.
Conflicts of interest are the area where most term sheets are weakest. A GP managing multiple funds simultaneously creates an inherent conflict over deal allocation: which fund gets the best opportunities? The term sheet should specify allocation policies, restrict the GP's ability to co-invest alongside the fund without LP consent, and require disclosure of any affiliated transactions. Anyone who has operated across multiple fund strategies sees these conflicts from the inside. When you are overseeing fund managers across multiple strategies and structures, you learn quickly which terms protect the investor and which exist to protect the manager's optionality.
Governance provisions determine what happens when the relationship deteriorates. Key person clauses, no-fault divorce rights, LP advisory committee composition, and reporting obligations are all negotiable and all matter. A key person clause that does not trigger meaningful consequences if a named individual leaves is not a protection. A no-fault divorce right that requires 75% of LPs to agree is almost impossible to exercise in practice. These provisions need to work under pressure, not just look reasonable on paper.
The GP's own commitment to the fund is the simplest test of alignment. A GP committing less than 2-3% of the fund from personal capital is asking investors to take risks the GP is not willing to share. Having spent years approving alternative product launches from an operational and technology perspective, I learned to apply the same test to every external fund manager relationship: is their commercial model aligned with our clients' outcomes, or structured to protect the manager regardless of what happens to the portfolio? Follow the incentives, read the exit clauses, and negotiate the terms that matter before you sign.
Written during the Oxford Said Business School Private Markets programme, 2020.
Case study source: Folly Bridge TECH I Fund term sheet negotiation exercise, Oxford Said Business School.