A commitment to a private capital fund is the beginning of a long-term relationship and requires strong conviction in the manager’s skills and considerable trust on behalf of investors. Detailed due diligence on the capability of the manager is critical. An evaluation of a fund should extend to an assessment of the fund’s commercial terms and the strength of the manager’s alignment of interests with investors.
Consideration of these aspects form part of Mercer’s manager research process, though they do not drive the process. A manager’s skill, competitive advantage and organizational stability remain paramount. We therefore do not encourage the appointment of inferior managers with superior terms but instead aim to promote continued improvement in alignment and governance structures over time.
This paper outlines and provides discussion of a number of aspects of alignment and governance with respect to private capital funds, including the fee structure, sharing of fund economics and key fund provisions. We separate the discussion into a review of financial incentives which influence Alignment of Interests and management terms which affect Fund Governance.