International Real Estate Fund Vehicles Using Opportunistic by lsg16921


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             International Real Estate Fund Vehicles
           Using Opportunistic Investment Strategies:
                An Agency Theory Based Analysis

Contact author
Prof. Dr. Nico Rottke
Real Estate Management Institute
European Business School

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    International Real Estate Fund Vehicles Using Opportunistic
                       Investment Strategies:
                 An Agency Theory Based Analysis


The role of real estate fund vehicles using opportunistic investment strategies (“opportu-

nity funds”) in international real estate investment markets has increased considerably in

recent years.1

To keep abreast of this development, the following paper proposes an investment model

for opportunity funds. The model analyzes opportunity funds as intermediaries between

capital that is in search of investment and the investment opportunity itself. The model

should create incentive compatibility among original investors (insurance companies,

pension funds etc), opportunity funds and possible local operating partners who are spe-

cialists in their home markets, by the integration of agency theory aspects.

A twofold relationship of delegation can be observed: Firstly, the opportunity fund acts as

agent for the original investor or principal. Secondly, the opportunity fund as investor is

the principal and the operating partner is the agent, who has a distinct advantage of


The different types of asymmetric information that come into play in these relationships

are then depicted. The way they affect the relationship between the transaction partners

is shown, and consequently the threats that result from an investment in real estate pri-

vate equity.

These threats are then countered by solution approaches, which are incorporated as

management and financial elements into an investment model, in order to maintain in-

centive compatibility beneath the transaction partners.


Opportunistic investments with real estate fund vehicles have become popular not only

in the United States in the end of the 1980s and beginning of the 1990s, but also today

in many other international markets. The latest example of a country that became a ma-

jor target of Anglo-American opportunity funds is Germany.

In 2003, international opportunity funds appeared as new type of real estate investor for

the first time on the German real estate investment market. It immediately took second

place, behind open-end real estate funds but ahead of closed-end real estate funds,

construction companies and owner users: 2

This fund category invests in so-called real estate private equity as external equity into

non-efficient market situations with the aim of a high internal rate of equity return (IRR).

Utilizing private equity for the financing of real estate investments is still a novel way of

innovative financing in Germany. The capital sources primarily come from Anglo-

American countries and comprise institutional and large private investors (high net-worth

individuals; HNWIs) as well as German foundation capital, which is still underdeveloped.

Germany is at the moment the No. 1 target country for real estate private equity in conti-

nental Europe. The reasons for this are the continuous weakness of its real estate mar-

kets and the increased willingness to sell problematic or underperforming real estate or

real estate loans, as well as the changing financial landscape. Some large transactions

have been closed in this sector, principally including the sale of some telecom packages;

portfolios of non- and sub-performing real estate loans of HVB or Aareal Bank; the pur-

chase of Berlin-based GSW by Whitehall/Cerberus; the purchase of Gagfah by Fortress

or the sale of the quoted company Viterra by E.ON. to Terra Firma’s German subsidiary

Deutsche Annington.

It must be questioned how the aim of a higher-than-average IRR can be attained for all

transaction partners. How can the parties involved in the transaction best be motivated in

order to deliver high performance, i.e. how can incentive compatibility be established be-

tween the transaction partners? Agency theory may deliver an answer.

In the following, an investment profit bonus model for opportunity funds is introduced as

the fund represents the intermediary between capital which is in search of investment

and the investment opportunity itself. The model creates incentive compatibility by inte-

gration of agency-theoretical aspects between

    -   original investors (such as pension funds or insurance companies),

    -   opportunity funds as main intermediaries, and

    -   local transaction partners.


The area of real estate private equity and opportunity funds, specifically the field of in-

centive models when using opportunistic investment strategies has hardly been re-


As late as 2002, the first authors began to publish academic work. Linneman and Ross

(2002) as well as Reiss, Levinson and Presant (2002) described as first authors the na-

ture of real estate private equity in relation to opportunistic investment strategies and

analyzed the major key drivers. Falzon, Halle and McLemore (2003) came from the pri-

vate equity side to describe the hybrid “real estate private equity” and the strategies how

to create value.

Within the same time frame, Lietz, Dewey and Chan (2001) and Lietz et al. (2003) sur-

veyed the industry and conducted first empirical analysis on real estate opportunity

funds. The aim was to establish standards, enhance transparency concerning opportu-

nity fund structure and to give an idea about the characteristics of opportunity funds.

Linneman and Moy (2003) then made a case study on return profiles of various real es-

tate investment vehicles, opportunity funds being one of them, to find out if there is a

way to benchmark returns of high-yield real estate products.

Also important in this context: Planting, van Doorn, and van der Spek (2004) from the

European Association for Investors in Non-listed Real Estate Vehicles (INREV) pub-

lished an empirical study about European real estate investment funds to define the in-

vestment styles core, value enhanced and opportunistic.

Finally, Douvas (2004) published a study which analyzed the fee structure in order to

suggest a number of solutions to compensate for misalignment of interest. Rottke (2004)

followed this approach and researched the setup of opportunity funds with regard to

agency theoretic aspects. As a result, he made suggestions for incentive compatible

contract clauses between sponsors, fund management and operating partners as well as

suggestions for an incentive compatible fee structure.


Opportunity funds are the dominant type of real estate private equity both as a result of

their acceptance as institutions and with regard to the amount of funds raised.3 The

structure of their transaction relations is summarized in the following:

The operative platform of an opportunity fund is depicted in figure 1. The outside rela-

tions are distinguishable from the management entity. Within the management partner-

ship, the two entities of fund management (responsible for multiple funds) and the spe-

cific fund raised can be differentiated.

The fund management consists of the (local) operative general partner(ship) or GP; the

investment committee; and a division for financial, legal and technical questions, which

can be used not only by a single fund but by all entities of the management holding.4

                                 external                                                              opportunity fund
                                                                                            capital flowback

                                                      monitors                   funds management                                        REPE
                                                                                                                                      fund n n
         monitors and finances

                                                                                              stake of 5 to 20%                        Fonds n

                                     seller                             general partnership                            disposes
                                                                            local acquisition- and                    resources   Deutschland
                                                                           asset management team
                                                                                                                                   in Germany
                                                       sells to                                                                       transfers
                                                                            gives account

                                                        fund                                                                            capital


                                                      buys for
                                                       fund                                                                           joint venture
                                                                                                                                  opportunity fund: ≈ 90%
                                                                                                                                    JV-partner: ≈ 10%

                                    original           reports        investment advises advisory                                     corporation
                                   investor                            committee          board                                       participation
                                                                                                                                  opportunity fund: >51%
                                                                        possibly represented                                        corporation: <49%

      consultants: financing-, legal-, technical- & administrative questions                                                       direct investment
                                     (internally within the holding or externally as supply of services)                          opportunity fund: 100%

figure 1: vehicle construction of an opportunity fund5

The team around the GP consists of persons in charge of acquisition and of asset man-

agement. In case of a potential opportunity, the GP consults her or his internal advisors

(advisory board), which do not have decision-making power due to their function as a

staff unit: their advice is generally non-binding. The advisory board may include the larg-

est original investors of the fund. Under some circumstances, advisory boards may also

be partly - or even totally - composed of third parties, which add industry expertise. Advi-

sory boards only consult, in accordance with the role of original investors as limited part-

ners. The final decisions are made by the GPs.

Should a possible deal – after sound due diligence – actually become worthy of consid-

eration as a potential investment, the GP will contact the investment committee. This

committee consists of the internal leaders of the company, usually the founders or man-

aging directors. It will discuss the potential opportunity with the GP and will afterwards

decide whether or not a transaction should be pursued.

The investment committee itself also communicates with the internal advisors on the ad-

visory board. Those members may be renowned experts in the industry as well. Their

network and their expertise are used, and their reputation should help original investors

in making their investment decision.6 The investment committee is the unit that carries

out fundraising for the multiple funds of the partnership. It has a duty to communicate

with the original investor about the status quo of the investment and it also participates in

the investment with its own equity.

This position therefore offers a tremendous amount of power but coupled with a high de-

gree of responsibility in relation to the original investors. The internal investment commit-

tee is therefore the major hurdle for a GP to overcome in order to execute a transaction.

The GP has to give an account to the investment committee and must defend his or her

potential investment in front of the committee: an external control mechanism is internal-

ized by an internal committee.

In order to have sufficient liquid funds available in the short term, equity is acquired in

the process of fundraising at the point of fund initiation. Equity providers are mostly US-

American institutional investors, such as insurance companies or pension funds but also

– to a lesser degree – charitable foundations or high-net-worth individuals (HNWIs).

When the capital call occurs, the capital is made available for a period of time negotiated

in advance. Rather than fundraising capital for a specific piece of real estate, opportunity

funds raise equity capital commitments. The original investors mainly do not know the

asset types or specific projects or property in which the fund will invest (blind-pool-


By discretion, the original investors grant to the fund management the power of attorney

for the committed capital. During the life cycle of the opportunity fund, which is normally

three to seven years, with an option to extend by one or two more years, intensive re-

porting takes place between fund management and the original investors concerning the

course of the investment. Single properties in the fund may, however, have holding peri-

ods of only 12 months to three years.7

After the investment decision is made, the GP takes capital from the respective real es-

tate fund. The management company, as a holding company, mostly has several funds

with different strategic emphases, as well as real estate: there may be for example ven-

ture capital-, mezzanine-, or leveraged-buyout funds.8 The relevant fund for high-yield

real estate investment consists of a portfolio, which, for reasons of diversification, invests

for example in the U.S., Asia or certain European countries. At this point the correspond-

ing resources are taken out of the fund.

In joint venture partnerships, the opportunity fund generally holds up to 90% of the

shares, but it requires the local partner, e.g. a developer, to co-invest around 5-10% of

the total fund volume. Although this figure is relatively small, for the real estate developer

it is a large contribution (hurt money) in absolute terms and therefore serves to unify the

interests in the project.

When funds are invested in a corporate participation, the fund management will normally

acquire more than 51% of shares in the corporation in order to gain strategic control. Di-

rect investments of the fund’s capital can be up to 100% of equity.

With the funds available, the GP purchases the site, the property, or the real estate cor-

poration for the opportunity fund by negotiation with the vendor.

The investment company aims to keep the equity portion of the investment as low as

possible in order to achieve a high leverage on the invested capital and therefore a high

internal rate or return (IRR) for the original investors. To this end, the transaction must

be capable of approval by the concomitant bank or bank consortium who will be provid-

ing the borrowed capital that forms the largest part of the financing structure.

The basic form of the fund concept is an implicit component of the transaction relation-

ship between opportunity fund, capital providers and property sellers. It is based on a

monetary incentive scheme, oriented on the mode of remuneration adopted by private

equity funds (see figure 2).

                0,5-2% management fee          management     representation in board
                (on committed capital);                       of directors or other
                 possibly representation                      substantial influence
                 in advisory board

                                 1-20% capital;          20-24% gains
                             operational control

                         80-99% capital                      investment         participation:
        original                                                                  joint venture
                                           opportunity n
                                           REPE-Fonds n
        investor                                                            corporation participation
                                                  n                             direct investment
                         76-80% gains                         gains

figure 2: compensation scheme of an opportunity fund9

In line with their agreed backing, the original investors pay around 80 to 99% of equity

capital to the opportunity fund. The fund is operationally managed, for a fee, by the fund


This fee is normally between 0.5 and 2% p.a. of fund capital.10 The capital invested by

the fund management itself varies between 1 and 20% depending on fund sponsorship.

Investment banks usually place a high emphasis on co-investment and so the proportion

may be as much as 20%, while other sponsors invest less due to their limited available

funds. Although a co-investment of 1% might appear insignificant, in absolute terms it

can be a substantial part of the capital of a general partnership.

The separation of fund and management allows the same team to manage several

funds. Capital is invested into the corporation, the joint venture or into direct investments.

The gains on disposal are usually split between the investors and the opportunity fund

management (carried interest) on an 80-to-20 basis.11

The structure of the fund aims to maximize the earnings of the original investors, to cre-

ate incentives for the fund management to achieve a high performance and, in parallel,

to minimize risk and agency problems.



The relationship between the opportunity fund, original investor and operative partner

can be characterized, in agency theory (a subspecies of new institutional economics), as

a twofold principal-agent relationship.

The types of information asymmetry to which such relationships are subject and the risks

that can result are discussed in the following paragraphs.

Agency theory deals with delegation relationships: One economic entity, the agent, is

instructed by another economic entity, the principal, to make decisions and execute ac-

tions on its behalf. The results of these actions influence the principal’s asset situation.12

This delegation relationship between the client (principal) and the contractor (agent) is

inherently subject to heavy information asymmetries, because the agent’s decisions in-

fluence not only the principal’s wealth but also the agent’s own.13 Information asymme-

tries lead to the agent having discretionary leeway for negotiation. The prerequisite for

the occurrence of such leeway, resulting from incomplete instructions, are the behavioral

uncertainties of the parties before and after time t0 (contract offer) and t1 (contract accep-

tance) (see figure 3).14

On the assumption that there is an incomplete and asymmetric distribution of informa-

tion, the time ‘t’ becomes relevant for different behavioral patterns, as from point ‘t’ a

classification can be undertaken.

                        screening                        decision making                     task execution
                   of potential agents                        of agent                     and exogenous risk
           t-1                                   t0                                t1                            t2      t

    problem situation                    contract offer                decision of acceptance         task success and
       of principal                        to agent                        of the contract            payment to agent

                 hidden characteristics               hidden information                   hidden action
                 Should a contractual relation        How can the result be judged?        How can the behavior or the
                 be established?                                                           achievement of the agent be

                                                          hidden intention
                                                          How can implicit claims be put through?

figure 3: Types of asymmetrical information distribution

t   -1   can be described as the point in time at which the principal recognizes that he has a

problem that requires a solution. t0, is the point where cooperation between principal and

agent begins, i.e. an explicit or implicit offer of a contract. t1 is the point of decision, e.g.

an investment decision by the principal or the commencement of action by the agent.

Finally, t2 is the point where the agent is remunerated.15

                                                                 - 10 -
Before a contract is offered (from t                    -1   to t0), the principal is uncertain whether or not he

should establish a relationship with the agent, since he cannot fully judge her or his

qualities. In the terminology of new institutional economics, the assessment problem in

reference to the agent is called ‘hidden characteristics’. After the contract offer but before

the employment decision is made, or before the agent begins to act on the behalf of the

principal, the principal is not able to observe and judge the agent’s level of information.

This agent problem is called ‘hidden information’ in the relevant literature. After the con-

tract offer and after an employment decision or the commencement of action by the

agent, the principal cannot assess the agent’s actions in the form of behavior and/or per-

formance. Theoretically, the principal might be able to do so, but the costs are very likely

to be prohibitively high. This problem area is described as ‘hidden action’. Finally, neither

before nor after contract agreement is the principal able to identify the agent’s hidden

aims and thus to secure the successful achievement of implicit requirements. In the

agency literature this phenomenon is referred to as ‘hidden intention’.16

The four basic types of behavior between principal and agent over the chronological pro-

gression of the contractual relationship can be schematically depicted as a quadrant

model in relation to the behavior of the agent (see figure 4).

                                                         behavior of the agent
                                             ex ante                                  ex ante
                                        exogenously given                             variable
                         well known
                          ex post
 behavior of the agent

                                       hidden characteristics                      hidden intention
                                      danger: adverse selection                    danger: holdup
                         not known

                                         hidden information                         hidden action
                          ex post

                                       danger: moral hazard                     danger: moral hazard
                                       and adverse selection                        and shirking

figure 4: basic types of agent behavior

                                                                - 11 -
On the one hand, there is the distinction whether the agent’s behavior is exogenous or

variable. Exogenous behavior can be characterized for example by fixed short- to me-

dium-term non-changeable characteristics such as talent, ability or qualification, or by

behavioral traits that are given but which remain hidden. Variable behavior, in contrast,

can be identified for example, by actions that demonstrate characteristics that are vari-

able in the short term, e.g. observable obligingness, fairness or goodwill as well as non-

observable characteristics like effort, diligence or care.17

On the other hand, it will be examined whether the results of the behavior are observable

and become known ex post or if e.g. the quantity, quality and speed of delivery of the

agent’s services remain in secret.18

In figure 4, under the assumption of asymmetric information distribution, the four arche-

types of normative and positive agency theory (hidden characteristics, hidden intention,

hidden information and hidden action) are arrayed, together with their consequent dan-


        -   adverse selection

            There is a danger of believing in exaggerated self-descriptions, qualifications,

            or motivation of agents who simply do not tell the truth. As a result the princi-

            pal may make precisely the one choice that should have been avoided.19


            Should one of the transaction partners have invested highly specifically, and

            therefore incurred sunk costs, the counterpart might try - by acting opportunis-

            tically - not to fulfill any implicit claims which are not regulated by the contract.

            By doing so, the counterpart might acquire the revenue due to the other part-


                                              - 12 -
        -   moral hazard

            There is a danger that the principal might not be able to assess the way the

            agent has carried out the instruction. The agent could misuse the principal’s

            information deficit to her or his own advantage. In doing so, she or he uses

            the possibility of discretionary leeway to the principal’s disadvantage.21

        -   shirking:

            There is a risk that the agent might deliver a poor performance because her

            or his efforts cannot be observed. Lacking sufficient incentive, agents may

            consequently reduce their level of activity.22


For the consequent dangers mentioned it is possible to develop theoretical approaches

to solutions that contribute to minimizing the agent’s discretionary leeway. Behavioral

leeway exists as a result of information asymmetry. By reducing it, agency costs will also

eventually be reduced.

These theoretical approaches to a solution will be identified in the following section:

Each type of asymmetric information distribution and its dangers can be assigned an in-

dividual approach to a solution in accordance with the basic time line (see figure 5).

To counter these dangers and to reduce agency-costs, institutions are established.23 In-

stitutions are ‘expectations which can be imposed with a sanction and which relate to the

behavior of one or more individuals‘.24 By coordinating expectations and thus facilitating,

forming and supporting rational behavior, they serve as a rationality surrogate for parties

with limited rationality of action.25

                                             - 13 -
                   screening                      decision making                   task execution
              of potential agents                      of agent                   and exogenous risk
      t-1                                 t0                               t1                           t2   t

 problem situation                  contract offer              decision of acceptance      task success and
    of principal                      to agent                      of the contract         payment to agent

            hidden characteristics             hidden information                 hidden action
            (adverse selection)                (moral hazard/adverse selection)   (moral hazard/shirking)
            signaling                          incentive systems                  incentive systems
            screening                          control systems                    control systems
            self selection                     self selection                     reputation & guaranty
                                               reputation & guaranty

                                                   hidden intention
                                                   reputation & guaranty

figure 5: suggestions for solutions to the potential dangers of information asymmetry

However, figure 5 shows that, to a degree, the same institutions, as possible solutions

for different risks, can also be considered as efficiency criteria under agency theory and

therefore also for types of information asymmetry.26 The reason for this is that the divi-

sion of asymmetric information distributions into four archetypes will, in reality, hardly be

seen in its pure form. The same holds true for individual risks and suggested solutions.

Apart from the principal’s control and incentive mechanisms, agents mainly prefer to use

the strategies of ‘reputation and guarantee’ in order to eliminate information asymmetries

and to signal their quality to the principal.

Using ‘signaling’ and ‘screening’, complementary strategies come into play, by which the

voluntary provision of information by the agent to the principal matches the principal’s

search for spontaneous information.27

Using ‘self selection’, the agent will be offered various types of contract, in the expecta-

tion that different types of agents will each choose different kinds of contracts. Thus, they

reveal their private information at the point of signing the contract and ultimately reduce

the existing information asymmetry.

                                                          - 14 -

The above-mentioned approaches to solutions will next be integrated, into an incentive-

compatible investment model of an opportunity fund, as explicit variables, taking into ac-

count the theoretical findings mentioned.

The framework of this incentive compatible second-best investment model is provided by

management and finance factors, which constitute the critical elements of the system.

7.1 Critical contract components: management factors

Section 7.1 deals with the question of structuring contracts between the original inves-

tors; an opportunity fund; and the operative partners respectively in a target corporation

in a way that is compatible with incentives, taking into account information asymmetry.

This issue will be examined by analyzing control and protection mechanisms in order to

minimize agency risks.

7.1.1 Control and protection mechanisms Advisory board

The main task of the advisory board is to represent the interests of the original inves-

tors.28 In the relationship between the fund management and the original investors, the

advisory board takes a position akin to that of a supervisory board or board of directors.

The individuals chosen to participate in the advisory board, mostly representatives of

original investors, do not act as agents of the investors as, for fiscal and legal reasons,

they must maintain their positions as limited partners.29

This status as a limited partner-trustee constrains them to act in a passive role as advi-

sors and only to intervene if the interests of the original investors are no longer being

safeguarded. They are not allowed to make decisions on their own account that exceed

                                            - 15 -
the limited liability of their stake in investment capital. The power to make decisions al-

ways rests with the relevant GP.30

The areas of responsibility of the advisory board are, e.g., to approve the GP’s invest-

ment proposals and to address any potential conflicts. Advisory boards can also be em-

ployed to approve profit distribution schemes, to check budget plans and to ensure that

annual auditing takes place. An advisory board can scrutinize results, approve depar-

tures from business plans or contracts and, if necessary and subject to a level of majority

specified in advance, can dismiss a GP from responsibility for a fund.

The size of an advisory board varies. Three to nine members can be regarded as aver-

age. The original investors that contributed major proportions of the fund volume nor-

mally have a seat on the board, as do independent experts and representatives of the

industry or well-known politicians. This structure should provide the fund with a high de-

gree of expertise, a larger networking capability and a higher standing. The GP can also

be a member of the advisory board, but without voting rights. The advisory board mem-

bers are generally appointed by name rather than being unknown company representa-


The advisory board plays a crucial role in the relationship between the fund management

and the original investors, a role which the latter often underestimate. This role can be

traced back to two principles of the entrepreneurial function that are separated in modern

corporate law. The duties of a unified entrepreneurial function are subdivided into a man-

agement function and an equity-provider-function. However, as the residual risk born by

the entrepreneur can be reduced by liability limitations, information asymmetries can be

used by GPs as agents in an opportunistic manner.32

Amongst other things, this leads to hidden action, i.e. problems of behavior and perform-

ance assessment after the signing of a contract. Establishing a control system can re-

                                           - 16 -
duce the dangers of moral hazard and shirking. The advisory board can be a prominent

part of this control system. It therefore is an institution for supervision of the fund man-

agement in the interest of the equity-providers.33

The original investors exercise an indirect control function by sending representatives to

the advisory board, or by agreeing to the lists submitted by the GP.34

The advisory board controls, supervises and dismisses – if necessary – the most impor-

tant decision-makers of the fund, in a similar way to the supervisory board in a corpora-


A well-functioning advisory board provides the original investors with more information,

which leads to a decrease in the asymmetrical distribution of information. This reduces

the risk of moral hazard and shirking. To protect the board members against the addi-

tional risks of this, usually honorary, function, which is not obligatory, additional indemni-

fication provisions and insurances should be contractually agreed.

A further agency problem results from the fact that advisory board members also pursue

their own interests as individuals. They do not necessarily act in the best interests of

their employer (usually the original investors) or the aims of the fund.36 The question that

has to be asked is: who controls the controllers?37 Indemnification provisions and insurance

Indemnification provisions for the GP and for representatives of original investors sitting

on the advisory board protect these individuals against personal liability and personal

loss as far as managing and advising the fund in concerned. For the above mentioned

German example, such clauses are generally not allowed for listed corporations (AGs)

but can be used by private limited liability companies (GmbH). In that case the liability of

the manager against her or his company can be restricted, within certain limits, in the

                                            - 17 -
company statutes, the rules of operation, the employment contract or in an agreement

for withdrawal from office. However, the limitation of liability is only valid for internal af-

fairs and not for management liability to outside parties.38

As liability cannot totally be excluded, its reduction is a vital issue for management. For

the German example, reduction of liability is often achieved by setting up detailed plans

for a business operation that delineate specific areas of accountability. Within a single

business area, delegating decision-making powers to lower-level employees reduces

liability. The responsibilities of each employee must, however, be precisely laid down in

the organizational structure.39 Additionally, directors and officers liability insurances

(D&O-insurances) can be taken out for top management.40

Because GPs of opportunity funds are responsible for a large amount of capital, which

they have to manage in a high-risk manner, indemnification clauses and D&O-

insurances need to cover a large part of the risk.41 However, if original investors accept a

lower standard in form of liability exemptions or insurance that cover nearly everything,

an important self-control mechanism is lost. Inter alia, GPs as agents would no longer

have to bear the consequences of using their discretionary leeway to act opportunisti-

cally against their principals. For one thing, there would no longer be sanctions against

the dangers of asymmetric information distribution, which would endanger the stability of

the system.42

Also, by accepting more limited indemnification provisions and insurance that do not ex-

clude all risk for their personal wealth, the GP demonstrates competence and thus en-

genders confidence.

                                             - 18 - Key person clauses

The decision makers in a partnership, generally the GPs, are the so-called ‘key per-

sons.43 Key-person clauses apply to information asymmetries in connection with hidden

characteristics and hidden information.

The original investor will ensure that the decision makers are not replaced during the life

of the contract, or that a prior-negotiated percentage of named individuals will be re-

tained in the fund management for the lifetime of the fund.44

One of the risks of hidden characteristics and hidden information, adverse selection, i.e.

having made the wrong choice, is thereby dealt with. The original investor uses key-

person clauses in order to ensure that her or his targeted choice of management com-

pany is not subsequently diluted by substitution of the active personnel. As well as the

signaling of reputation, the minimization of information asymmetries is achieved by

means of guarantees: the key-person clauses.

The grounds for not allowing the withdrawal of GPs, who are generally nominated as key

persons, are equally important for original investors, for whom early withdrawal of their

capital commitment is usually not possible.45

Should a key person depart, through death or for health reasons or due to excessive

demands, the consequent procedure should be detailed in the key-person clause, e.g.

prior determination of a named substitute.

If original investors withhold their funds because they cease to trust a decision maker of

the fund, they have the possibility immediately to relieve him from her or his position pro-

vided there are sound reasons for doing so. A majority, usually of two-thirds to 90% of

the original investors, must be in favor. Another way to remove a key person from office

is indirectly, through the advisory board.46

                                               - 19 -
In order to effectively counteract the risks of adverse selection from the very beginning, it

is crucial that the written guarantee is effective, i.e. that removal for ‘good reasons’

should be made operational. Should this not occur, there is a continuing risk of informa-

tion asymmetry continuous, since there is a distinction between whether a GP can only

be removed from her or his position if he were to commit an illegal act; or to be guilty of

gross negligence; or even if her or his decisions turn out to have been too risky after the

event. disclosure of information

The disclosure of information by GPs with regard to personal capital commitments and

potential conflicts of interest is directly related to the information asymmetry of hidden

information, with the resulting dangers of moral hazard and adverse selection. In order to

counteract these threats, original investors require that the opportunity fund manage-

ment, and in turn the opportunity funds demand that their local partner companies dis-

close certain information, at the point of signing the contract. Using this control mecha-

nism, the above-mentioned agency risks are reduced.

The information disclosed by key persons, which the original investors will usually re-

ceive directly in the course of their due diligence, includes, for example:47

         -   the amount of time required for other business activities,

         -   employee relationships with other investment vehicles,

         -   membership of the advisory board of other vehicles, and

         -   past or present law suits of the key persons as partner of a general partner-


                                             - 20 -
In order to further reduce hidden information risks, original investors might also ask the

following questions, which however may not always be answered by the key persons:48

       -   capital commitment as a percentage of personal wealth,

       -   capital commitment as a percentage of carried interest in past funds,

       -   personal law suits,

       -   physical health,

       -   salary structure within the fund management,

       -   financial relations between a general partnership and the family members of

           the key persons, or

       -   subsidiary agreements with other original investors.

7.1.2 Incentive mechanisms and their risks Timing problem with capital acquisitions

Opportunity funds and original investors would prefer to secure the total committed capi-

tal of a fund by a deadline date. In practice, however, often several small closings follow

the initial large closing. Early investors feel disadvantaged because their capital is at risk

for longer than that of later investors, on whom no resulting penalty fee is imposed.

In order to maintain the effective incentive for early investors, clauses should be inte-

grated to guarantee the functioning of the incentive system between the different princi-

pals. One possible way is to limit capital fundraising after the first large closing to a cer-

tain time horizon, say six to 12 months. In order to align the interest of the early investors

and to keep the size of the fund within planned limits, the additional capital raised should

also be limited to a previously negotiated sum. Should later investors wish to participate

in earlier investments that occurred before their commitment of capital, they should pay

                                            - 21 -
the original investors compensation for interest over the time span from the original clos-

ing date to the date of their own participation.49 Co-investment

In principle, original investors as well as GPs of opportunity funds or operative partners

have the possibility to co-invest.50

Two different kinds of co-investment can be distinguished: direct co-investing and cross-

over-co-investing. Using direct co-investing, all three parties have the option of further

direct participation in the investment in addition to their indirect participation through the

opportunity fund. Crossover-co-investment works in a different way. Here, the opportu-

nity fund is aimed at investments, properties or projects in which another opportunity

fund, associated with the fund management, is already invested. The fund then invests

in the same investments, objects or projects.51

In order for incentives to be effective and to minimize the risks of moral hazard and shirk-

ing, agents – in this case GPs or operative partners and the management of a target

company – should be forbidden to co-invest arbitrarily, since this may lead to inefficient

incentive effects. If, for example, GPs were allowed to co-invest according to their ideas,

they might potentially be able to use their information advantage to co-invest in the most

attractive investments of the fund they manage. The riskier investments would conse-

quently be financed at a higher percentage by the fund itself. Also, conflicts of interest

can arise if GPs, as single investors, take a different position in the financing structure

from that of the fund itself. They might for example have priority as senior debt, in con-

trast to the fund or the original investors, which subsequently receive the proceeds of the

unsecured equity-position.52

                                             - 22 -
Consequently, co-investments of agents should only be allowed if they invest pro rata in

the same way as the fund does. They also should only be allowed to invest at conditions

no more advantageous than the fund in order to achieve alignment of interests.53

As a basic principle, from the perspective of agency theory, a co-investment by the prin-

cipal, in this case the original investor, does not appear to be critical. However, the prin-

cipal should only be allowed to co-invest after the fund has already achieved its targeted

capital allocation.54 Distribution policy

The original investor and the opportunity fund receive their share of profit when individual

fund properties are sold and the fund is entirely wound down.55 Normally the manage-

ment only begins to make money after the original investors have received their repay-

ments of capital plus a preferred return as a prior negotiated percentage. Lietz et al.

showed, in a study which surveyed 156 opportunity funds, empirically (to 84%) that this

“hurdle rate” is between 9 and 12%.56

As well as the determination of the magnitude of the profit distribution, the time that the

distribution takes place is also a decisive factor. There are three common variants:57

    -   the fund management and the original investors receive their profits at the same


    -   original investors receive their share of profits at a prior agreed date, or

    -   the profit shares of fund management are deposited in an escrow account in the

        care of a trustee, until certain conditions are met (escrow agreement). If these

        conditions are not complied with, the profits of the fund management can be held

        back (hold-back-clause).

                                             - 23 -
In terms of agency theory, the relationship between the original investor and the oppor-

tunity fund is only incentive-compatible if the original investor minimizes hidden action

and the related risks of moral hazard and shirking by incentivizing the contractual

relationship. If the original investor first receives repayment of her or his original capital,

and then a preferred return, of the approximate magnitude of the opportunity fund’s man-

agement fee, and then the opportunity fund receives a disproportionate level of participa-

tion, the fund management is given an incentive to achieve this minimum target in order

to attain a disproportionately high yield.

If escrow accounts are used, there should be precise rules to determine how much may

be withdrawn by a particular key person and under which conditions payments may be

authorized. The granting of this additional control mechanism increases the confidence

of the original investors and reduces negotiation time in the settlement process.58

7.2 Critical contract components: financial factors

Section 7.2 deals with the question how contracts between original investors, the oppor-

tunity fund and the operative partners (and the target companies respectively) can be

structured to be compatible with incentives, taking into account information asymmetries.

This issue is analyzed by taking financial incentives principally as a measure to reduce

moral hazard and shirking in particular.

7.2.1 Agency-relevant risks of fund financing

Most opportunity funds do not allow original investors access to information concerning

local joint venture partners or other intermediaries. It is therefore almost impossible for

original investors to estimate the gross IRR at investment level.59

                                             - 24 -
An example is shown in figure 6 which makes clear that, assuming standard conditions60

at a 20% IRR only approximately 75% of the net return is passed on to the original inves-


          18%                                     0,11%
          16%                      2,32%
                                                                 joint venture partner
                                                                 management fee
                                                                 carried interest
           8%                      14,65%
                                                                 net equity IRR for
           6%                                                    original investor

figure 6: Example of an IRR-distribution scheme

This also underlines why many opportunity funds are beginning to question the idea of a

joint venture with a local partner in the respective country, as de facto a double promote

has to be paid. Alternatively, the conditions for joint venture partners deteriorate, with a

negative effect on their incentive structures. As a result, some local joint venture compa-

nies are prompted to raise institutional capital for their own, generally relatively small,

funds themselves.61

Due to the lack of information, it is also nearly impossible for an original investor to esti-

mate the level of dilution between gross and net IRR. If the fund performs badly, the

question is whether this is the result of a poor performance and inefficiency of the man-

agement; the economic situation; or the high premiums and internal fees at different lev-

els of the fund. According to the assumptions of hidden action, the original investor can-

                                             - 25 -
not determine whether either a positive or negative result due to external effects has its

origins in good or bad performance by the GP.62

If an original investor gains negotiating power in times when fundraising is difficult, she

or he should try to include the availability of this type of information in the contract.63 In a

market for opportunity funds that is undergoing consolidation, companies with a good

reputation will take measures to prove transparency in order to keep their client base.64

Transparency is, however, indispensable for original investors in order to be able to cal-

culate an accurate debt capital quota and consequently, to be in the position to assess

their own risk and to estimate their readiness to invest. Debt capital is not regularly con-

solidated in a standard form at investment level. It may also not be necessary to report

the amount of debt at fund level. It may well be that the IRR achieved, albeit positive, is

too low in relation to the risk taken. If the original investor does not have full transpar-

ency over the total process, he cannot evaluate the true risk that is associated with the


7.2.2 Provision of capital

The provision of private equity and its division between the original investors and the

fund management was shown in figure 2.66

It holds generally true that the more GPs participate in their fund with their own capital,

the better the alignment of interests is achieved. The absolute amount of capital is of

lesser importance: alignment of interests is created as soon as the sum personally in-

vested equates to a substantial proportion of the investor’s private wealth. The incentive

to act opportunistically by exploiting discretionary leeway in the form of hidden action is

therefore minimized.67

                                             - 26 -
In practice, GPs of US-American opportunity funds are required by federal tax law to in-

vest a minimum of 1% of own equity in the issued fund. To be regarded as more credible

and in order to indicate the quality of their own performance, up to 20% or even more of

the fund capital is in practice provided by GPs. At the higher percentage levels, the

sponsors are usually investment banks.68

GP capital can be paid in by the GP in cash; as promissory notes; as distrained equity

from a previously executed fund transaction; or by setting off expenses the GP will incur

for the fund. Original investors typically lodge their funds in cash.

If GPs participate with more than 1% in their fund, they can also do so as limited partner

on the same level as the original investors. Risk is minimized as their capital participation

will also be given preferential service.69

To increase the incentive of a high IRR as a measure of successful fund performance,

the deposit schedules (capital calls) will state by which dates the original investors must

pay over their committed capital.

In the private equity sector, rigid rules were usual at the beginning, such as the require-

ment to pay in one third of committed capital at closing day, another third two years later

and the remainder after four years.

However, early high-volume payments from original investors are not efficient if they

cannot be invested immediately as they must otherwise be placed in money market ac-

counts at low interest. Right from the beginning this will lower the overall IRR.

Flexible, just-in-time agreements have now been widely accepted. Such concepts lead to

a higher IRR, since capital is only reflected in the IRR calculation when the fund man-

agement has control over it. Original investors are informed of the volume of required

capital five to 60 days before the capital call.70

                                             - 27 -
A time limit is agreed upon within which the partnership must have called the total

amount of committed capital.71

The introduction of a line of credit for the fund reduces the consequences of a just-in-

time concept. Within prior defined limits, funds can be used flexibly and quickly, which

increases the chances for fund management to participate in discount deals and moder-

ates the phenomenon of the J-curve.72

In this context, however, attention must be given to incentive-efficient contract structures

to avoid hidden action: lines of credit can potentially be abused by the GPs.

7.2.3 Administration fees

For operational fund management, management fees are required. The original inves-

tors have to pay these fees to the opportunity fund. Depending on the level of these fees

and in association with GP’s other sources of income (e.g. the carried interest; see

7.2.4), the so-called management fee can result in either a closer alignment or a diver-

gence of interests between the original investor and the opportunity fund in terms of

moral hazard and shirking.

The management fee is not intended to be a reward for the fund management but rather

as a way for the fund management to cover current expenses. Because of this, it is set

up in a way which is independent of performance. Usually, the management fee is paid

quarterly or biannually.73 In comparison to the carried interest, it is modest.74 As the fund

increases in size, the management fee decreases. It can be observed that original inves-

tors tend to have a high degree of negotiating power due to the high competition for capi-

tal. As a consequence, the management fee tends noticeably to decrease.75

The original investor and the opportunity fund must agree the percentage management

fee to be charged as well as its basis of calculation.76 Management fees are regarded

                                            - 28 -
positively by original investors, since they aim at alignment of interest with the GPs.

Unlike traditional funds, they do not want to use linear, incentive-neutral or incentive-

reducing fee schemes.77

The management fee is based either on committed capital, typically around 1 to 2%, or

on capital actually invested, in which case the management fee is typically 0.5 to 2%.78

The traditional management fee is a fixed percentage of invested or committed capital.

This inflexible method has become less rigid over time.

The budgeted management fee is renegotiated annually and is based on actual ex-

penses incurred. As a rule, it is presented to the advisory board for negotiation. GPs do

not favor budgeted management fees, as the degree of decision participation by original

investors is regarded as too high.

A sliding-scale management fee varies over the life cycle of the fund. At the beginning,

higher costs are incurred, for example for due diligence processes, than occur in the in-

vestment or exit phases. A sliding-scale management fee is therefore higher in the first

half of the fund’s life cycle and decreases in the second half.79

Transaction fees are also charged, primarily by investment banks as sponsors of oppor-

tunity funds, for example for acquisition (50-100 basis points), disposal (50-100 basis

points) or financing (30-40 basis points). They are deducted from the management fee.80

The investment banks originally used to pocket up to 100% of these fees. Currently,

these extra profits are shared with the original investors. Transaction fees should also be

able to be set off against prior or subsequent management fees in order to achieve

alignment of interests.81

The procedure for collecting management fees can result in divergence of interests be-

tween the original investors and the fund management. The danger exists, for example,

that what should be the main task – to generate value added – becomes a secondary

                                            - 29 -
goal to the collection of numerous upfront fees. Having said that, there is a counter-

argument that the best fund management will generally charge the highest fees. An

original investor will inevitably prefer a high management fee of 2.5% and a fund per-

formance in the upper quartile to a low management fee of 1% and a performance in the

lowest quartile.82

The risk of moral hazard can also occur if an opportunity fund delays the sale of a prop-

erty or a portfolio, after successful problem solving, in order to profit for a longer period

from the management fee based on the invested capital. For example: If the net disposal

proceeds were estimated to be very high, but the fund manager does not sell, provided

the property still generates a high yield the target IRR is not endangered by a longer

holding period. However, the original investor loses the opportunity to achieve an even

higher IRR (by earlier disposal of the property) and to invest the capital in another high-

risk project. This problem can be partially solved by setting fixed maximum investment

periods in the contract.83

7.2.4 Distribution of proceeds

When a fund exercises strategies in the opportunistic, high-risk area, the alignment of

interests between principal and agent becomes more important than ever.84 The so-

called ‘carried interest’ – a participation in profits – is an incentive-efficient method that

can align the interests of the fund management and the original investors if it is appropri-

ately structured.

If the forecast IRR on equity is achieved, the carried interest will form the largest amount

of remuneration for the opportunity fund.85 As it is structured in a way that it increases

disproportionately to increases in IRR, the fund management has a strong incentive to

achieve its targets and, if possible, to exceed them. In contrast, the higher a manage-

                                            - 30 -
ment fee is set in relation to the carried interest, the lower the incentive for the manage-

ment of a fund to achieve a high IRR.86

A carried interest of approximately 20% of net proceeds has become established as a

standard in the private equity industry. 80% of the proceeds are paid out to the original

investors. The procedure for distribution of proceeds is that original investors are first

repaid their original capital, plus an agreed minimum interest rate as preferred return at a

hurdle rate of about 8% p.a.87

Next, the opportunity fund receives a lump-sum payment after which, if profits have ex-

ceeded the hurdle rate, the 20/80-rule is applied. Around 75% of all opportunity funds

adopt a 20/80-model.88

The 20/80-model is incentive-inefficient when funds only achieve an average perform-

ance, as they are then de facto overpaid. The IRR actually achieved is then too low in

relation to the high risk to which the original investors had been exposed.

The carried interest, therefore, should not automatically be 20%, but should be meas-

ured according to performance. Catch-up clauses based on waterfall models offer the

possibility to relate carried interest to performance.89

The catch-up of the GP refers to the procedure for the distribution of profits. After paying

back the invested capital, a preferred interest rate is paid to the original investors. Next,

GPs are paid a disproportionate (to their advantage) distribution, for example 50/50 or

40/60, in order to achieve their 20% profit participation.90 GPs thus receive a higher pro-

portion of distributed profits above the hurdle rate up to the point where the negotiated

20/80 split for the whole fund is reached.91

Not only the magnitude but also the time when the carried interest is paid out is impor-

tant. There are two possibilities: payout at portfolio level from the aggregated net pro-

ceeds of the fund; or payout after each transaction is executed. In the first case, the GP

                                             - 31 -
does not receive a considerable proportion of her or his salary until relatively late, which

prolongs the incentive to perform.92 In the second case, a payout at transaction level

may lead to over-distribution. So-called clawback- or look-back clauses guarantee a

higher degree of security to both sides.93

Clawback-clauses firstly protect the original investor against the over-allocation of net

proceeds to the fund management, above their negotiated profit participation.94 The fund

management has to refund over-allocations of profit should the payouts on individual

transactions at a high value in the early years be followed by significant losses on later

disposals. Frequently, a proportion of the carried interest is held in an escrow account.95

If the fund management agrees to introduce clawback-clauses, this strengthens the

reputation of the fund on the market and boosts the confidence of the investors in the


Escrow accounts seem to offer a viable solution to allow for possible repayments of capi-

tal to the original investors and to avoid the negative effects of death, dismissal or unex-

pected financial distress of GPs if the clawback-clause is executed. A portion of the car-

ried interest, e.g. 25%, might be paid onto an escrow account for a pre-negotiated period

of time.97

With increasing scarcity of fund capital, the negotiating power of original investors rises.

A few years ago, GP’s conditions were accepted without hesitation. Now, however,

original investors try to safeguard their IRR wherever possible. For clawback-clauses a

deciding factor is the exact choice of guarantor for the outstanding sums. Two cases can

be distinguished: The ‘joint-and-several clause’ means that every GP stands as guaran-

tor for the total amount outstanding. The weaker ‘several-clause’ means that every GP is

only responsible for their pro rata share. In practice, only about one in four GPs is liable

for a total sum, approximately three out of four have only partial responsibility.

                                             - 32 -
Out of fear of full responsibility for the total amount outstanding, which might financially

ruin a GP, GPs often reduce or even waive their management fee in order to get around

clawback clauses. So-called true-ups help to make clawback-clauses manageable. GPs

pay their surplus carried interest quarterly or annually into an internal account, in order to

avoid a sudden financial burden when winding down the fund.98


This paper discusses the question of incentive compatibility between the main transac-

tion partners of an investment with real estate private equity, taking as an example the

best-known real estate investment vehicle using real estate private equity in an oppor-

tunistic investment strategy: the opportunity fund.

Using agency theory, information asymmetries within a twofold agency-relationship,

which lead to imbalances and accordingly to risks for incentive compatibility, are demon-


In a further step, and as the key message of this paper, critical factors for an incentive-

based investment model for opportunity funds, which could reduce or control discretion-

ary actions of the agent, were analyzed, in accordance with the risks and perceptions of

agency theory. These factors would allow for relationships between original investors,

the opportunity fund and local partners that were compatible with incentives.

These findings can be applied in practice in order to enhance the degree of transparency

of the opportunity fund as an indirect real estate vehicle. Cooperation, in a mode com-

patible with incentives, may become possible for international institutional investors as

well as for medium-sized local partners, e.g. development companies.

                                            - 33 -

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    Special thanks go to Dr. Karl-Werner Schulte, Professor at the Department of Real Estate, University of
     Regensburg, Germany, for making helpful recommendations and suggestions in the final stage of this
  See ATIS REAL Müller (2004), p. 9.
  See Leykam (2001), p. 4.
  Compare to Rottke (2003), pp. 33.
  See Rottke (2004), p. 103.
  See Rottke (2004), p. 34.
  See Rottke (2004), Chap.
  See Rottke (2003), pp. 33.
  See Bader (1996), p. 156.
   Lietz et al. showed in an empirical analysis in 2003, that the management fee of 151 opportunity funds
   with regard to invested capital is between 0.5-2%. With regard to committed capital, it amounts to 1-2%.
   Compare to Lietz et al. (2003), p. 12.
   See Bader (1996), pp. 155. Lietz et al. find out that 73% of 149 opportunity funds questioned in their study
   receive a carried interest between 20-24%. See Lietz (2003), p. 14.
   See Herzig/Watrin/Ruppert (1997), p. 765.
   See Feldmann (1999), p. 132.
   The above stated assumption of opportunism is only critical to the principal if the agent has an information
   lead, i.e. if information asymmetries exist. Compare to Herzig/Watrin/Ruppert (1997), p. 765. Pi-
   cot/Schuller (2001), p. 83.
   See Breid (1995), p. 824; Fischer (2004), p. 96.

                                                     - 36 -
   See Breid (1995), pp. 823-825; compare in depth Richter/Furubotn (1999), pp. 162; Picot (1989), p. 368;
   Fischer (2004), pp. 105-107; for a different classification, see Spremann (1990), pp. 565-572; Glück
   (1996), p. 164; Schulz-Eickhorst (2002), pp. 112-115.
   See Spremann (1990), p. 565.
   See Breid (1995), p. 824.
   See Göbel (2002), p. 101.
   See Spremann (1990), p. 568-570.
   See Jost (2001), p. 26.
   See Göbel (2002), p. 102.
   See Picot/Fiedler (2002), p. 242.
   See Dietl (1993), p. 37.
   See Picot/Fiedler (2002), p. 242.
   See Picot/Schuller (2001), p. 79.
   See Spremann (1990), p. 579.
   Compare to Urdang (2003), p. 3.
   The advisory board is also called ‘advisory committee’. See Douvas (2003), p. 9.
   See Mercer (1996), p. 34.
   See Mercer (1996), p. 34.
   See Baums (1994), p. 1.
   See Martens (2000), pp. 18; Baums/Scott (2003), p. 25.
   Prowse stresses the advisory board as means of control. Compare to Prowse (1998), p. 28.
   See §111, German corporation law (AktG). Compare also to Audretsch/Weigand (2001), p. 94; Thom-
   men/Achleitner (2003), p. 70.
   See Martens (2000), p. 3.
   See Auge-Dickhut (1999), p. 33-37.
   See Thümmel (2003), p. 150; pp. 155.
   See Weber (2004), p. 2.
   In Germany, D&O-insurances cannot be taken out for business partnerships. Compare to Falk (2004), p.
   228; Weitnauer (2001), p. 221; p. 287. D&O-insuraces are comparable to German ‘Rechtschutzversiche-
   rungen’ and ’Vermögenshaftpflichtversicherungen’.
   The specific rules within the insurance contracts are key to managers. See Weber (2004), p. 2.
   See Sherstyuk (2000), pp. 725.
   See Rottke/Holzmann (2003), p. 20.
   See Mercer (1996), p. 46.
   Compare the literature dealing with the purchase of secondary shares of original investors by secondary
   market funds, e.g. Borges (2003), p. 2.
   See Mercer (1996), p. 53.
   See Mercer (1996), p. 42.
   See Mercer (1996), p. 42.
   See SJ Berwin (2001), p. 2.
   See Myers (2000), p. 1028.
   See SJ Berwin (2001), p. 1.
   See Mercer (1996), p. 36.
   See Douvas (2003), p. 9.
   See Mercer (1996), p. 36.
   Fund management will remunerate its local partner normally to the same conditions (promote) it is remu-
   nerated itself.
   Only 7% of the funds did not negotiate a hurdle rate. Compare to Lietz et al. (2003), p. 13.
   Other distribution schemes are listed in: Levin/Ginsburg//Rocap (2003), §10-10f.
   See Mercer (1996), p. 43.
   See Lietz/Dewey/Chan (2001), p. 3.
   Assumptions: JV-partner receives 30% profit over a 13% hurdle rate; costs: 15 basis points (BP) on com-
   mitted capital; management fee: BP 150 on committed capital; carried interest: 20% over a 10% nominal
   hurdle rate with a 60% catch-up clause. Compare to Douvas (2003), p. 1.
   See Lietz et al. (2003), p. 30.
   See Spremann (1988), pp. 616.
   See McGurk (2002), p. 2.
   See Lietz et al. (2003), p. 30.
   See Littlejohn (2003), pp. 2.; McGurk (2001), p. 3.
   The operative partner is not further dealt with, since its incentivization equals the one of the opportunity
   fund itself. Compare to figure 2, p. - 5 -.
   See Göbel (2002), p. 115.
   See Achleitner (2001), p. 715.

                                                     - 37 -
   However, the GP’s limited-partner-shares do not receive voting rights. See Mercer (1996), p. 10.
   See Mercer (1996), p. 12.
   See Blaydon/Wainwright (2003), pp. 3.
   See Littlejohn (2003), p. 2-4.
   See Cook (1998), p. 22; Bader (1996), p. 157.
   See Levin/Ginsburg/Rocap (2003), §10-12; Achleitner (2001), p. 716.
   See Achleitner (2001), p. 716; Weaver (2003), p. 5; Cleary (2001), p. 1.
   See Fenn/Liang/Prowse (1995), pp. 38.
   See Spencer (2000), p. 37.
   43% of all opportunity funds (n=151) surveyed in the Lietz-study take invested capital as a basis of the
   management fee (after closing of the capital commitment period). See Lietz et al. (2003), p. 12.
   See Mercer (1996), p. 23-27.
   The amount of basis points is related to investment volume and depicts current average values of the in-
   See Achleitner (2001), p. 268.
   See Cleary (2001), p. 1.
   See Linneman/Ross (2002), p. 10.
   See Albertson (2000), p. 52.
   This holds also true for local partners which generally receive the same of even better conditions as the
   opportunity fund from the latter.
   See Mercer (1996), p. 13.
   See Murray (2001), p. 9; Weitnauer (2001), p. 83.
   See AVCAL (2001), p. 18; Weaver (2003), p. 5.
   See Linneman/Ross (2002), p. 10.
   Alternatively, the distribution can be executed taking a series of IRR-based hurdle rates. See Douvas
   (2003), p. 8.
   See Lietz/Dewey/Chan (2001), p. 15.
   See SJ Berwin (2001), p. 3; Weaver (2003), p. 5.
   See Harrell (2003), p. 12.
   See Douvas (2003), p. 8.
   See Blaydon/Wainwright (2003), p. 4.
   See Cleary (2002), p. 1.
   See Lietz/Dewey/Chan (2001), p. 15; Mercer (1996), p. 20.
   See Deloitte & Touch (2003), p. 12.

                                                    - 38 -

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