Given the level of detail and the nuances of design that now underpin private equity funds' economic terms, however similar their headline levels appear on the surface, it would be a misjudgement to state that those terms have not adjusted over time. LPs have generally been the beneficiaries of better-crafted and more complex terms, as they have used their experience, weight of capital, and negotiating power to narrow definitions and to anticipate differing outcomes. The intent of these more closely honed terms has usually been to protect against 'downside' scenarios that could harm LPs' economic interests and potentially lead to their misalignment versus those of the GP.

This said, it is fair to observe that the basic outlines of private equity funds' principal economic terms have remained remarkably static over the last few decades. The 20 percent carried interest stake for GPs and 'published' management fees of at least 1.5 percent still apply even to mega-funds, where the potential current and long-term income streams for the GP can be prodigious given the billions of capital these funds have in firepower (however, as discussed above LPs have begun to erode that full rate through various forms of discounts and fee savings).

Many LPs were concerned generically for years about the relatively fixed nature of these terms, but they either did not seek or were not able to change them specifically until the GFC. Fundamentally, management fees are loaned by LPs to GPs, and LPs drew comfort from the fact that virtually all private equity funds in the past have at least returned their original capital plus a modest profit sufficient to cover the preferred return. In addition, generally speaking, the net returns earned by LPs on private equity funds (that is, after payment of carried interest to GPs) were sufficiently compelling in absolute terms and sufficiently superior relative to public equity benchmarks to justify continued commitments to the asset class despite its higher costs.

Notes: Includes fully and partially realized deals; all figures calculated in US dollars; post-2018 data not shown, as most deals entered later than 2018 are still unrealized

However, beginning in late 2008 and through to mid-2009, financial markets and virtually all asset classes, including private equity, experienced significant losses, at least on a mark-to-market, if not a fully realized, basis. A long period of slow recovery in macroeconomic conditions set in thereafter, with financial markets rebounding (largely as a result of massive quantitative easing by central banks) well ahead of clear evidence of rising earnings and renewed corporate health 'on the ground'. As such, exiting investments profitably and generating cash returns to LPs was problematic for most GPs well into 2012. It was only in 2013 that revived portfolio company performance, highly liquid and attractively priced debt markets, renewed trade buyer M&A activity, and supportive and open equity markets all coalesced positively to allow a huge flow of realizations and cash back to LPs and a real recovery in private equity fund performance.

In these volatile circumstances over the last five years, some long-held preconceptions that have affected the balance of power in the past between GPs and LPs in negotiating private equity funds' economic terms were shattered. Some funds did not return their committed capital, turning the 'loans' that are management fees into bad, irrecoverable debts. In addition, while their relative performance may have remained reasonably compelling on a longer-term basis versus public equity returns, in this troubled period private equity funds also fell well below their historic norms in the net, absolute performance they produced, leading to much greater investor focus on fees and costs. Finally, at least until 2012, capital for new commitments to funds was in short supply and withheld by LPs in large measure from all but those private equity funds that met particularly high thresholds as to quality and terms.

In these circumstances, it was not surprising that investors had a long-anticipated opportunity to adjust, in practice, the headline, foundational economic terms of private equity funds, in particular reducing management fees (especially on larger funds via discounts). They also made significant progress in eliminating an ongoing GP share of net transaction fees, under the terms of most private equity funds formed after the GFC. On smaller, more technical points affecting the inner architecture of funds' mechanics, LPs were also not shy in suggesting changes favorable to them, leading often to dozens of LP comments on draft limited partnership agreements and protracted legal processes when a new fund is formed.

However, with the exception of an important move to near uniformity in its computation and waterfall mechanics (such that whole fund methodologies are now market standard, not just in Europe but also now the US), the largest 'line item' of cost to LPs arising from private equity fund investments (assuming funds perform and produce material capital gains) remains at its pre-crisis level. This is, of course, carried interest, which overwhelmingly is still a fixed 20 percent share of a fund's profits delivered to its GP, once preferred return requirements have been satisfied. As a result, LPs have added extra downside protection via the whole fund methodology (as it makes a material impact on the division of rewards between a GP and its LPs, particularly when a fund produces a mix of successful and failed investments) but have allowed significant upside to remain available to a GP managing a successful fund by not reducing the 20 percent stake. There has been some talk of tiering of carried interest, such that the full 20 percent rate would not kick in until the achievement of a certain threshold of returns, and with lesser rates applying to less satisfying results (say a 10 percent rate above a 10 percent net IRR, a 15 percent rate above a 15 percent net IRR). To date, however, LPs have not exercised sufficient collective will to bring about these innovations and appear content that, by definition, carried interest is a payment for performance and is therefore self-financing and not a fixed expense.

In striking these balances - cutting the shorter-term expense load of investing in a private equity fund and eliminating transaction fee leakage to GPs, while allowing GPs to retain a huge longer-term incentive if they perform - LPs have acted sensibly to contain the excesses of the asset class while preserving the profit motive that leads to its superior performance. While undoubtedly there will be more and more negotiation on the margins of terms over time (as LPs show no signs of dropping their now sharpened pencils), it seems likely that this sensible balance on the major provisions of private equity partnerships will form the mainstream of the GP-LP market for the foreseeable future. The probability is that further change will only come in response to significant shifts in macroeconomic or market conditions, rather than from continuous or incremental adjustments.

Private equity's remarkable resilience over the past decades has its foundation in the alignment of interests between GPs and LPs. A changing landscape does not signify a fundamental break from the past but rather an adaptation to new realities, as it has always done. The partnership model, with its evolving dynamics and terms, will continue to ensure that both parties reap the benefits of their collective efforts and investments.