Give LPs a break

As LPs increasingly push back on deal terms, GPs may want to consider some relatively low cost moves to mitigate their concerns, writes Kevin Ley.

A recent amendment by Kohlberg Kravis Roberts to its 2006 fund is another sign that firms must be willing to give up some ground as LPs increasingly push back on terms such as deal, management and transaction fees.

KKR’s amendment would lower the minimum deal size threshold at which LPs can co-invest alongside KKR 2006 Fund LP to $250 million from $600 million. Such a change will make it easier to invest for LPs who are especially feeling the pinch from the recession and can’t put up as much money as before.

With a liquidity crisis in full effect, KKR is just the latest firm to offer relief to its investors. Previously, San Francisco-based TPG cut the size of its $6 billion Financial Partners Fund by 25 percent and cut management fees across the board, while London-based Permira allowed investors to cap at 60 percent their original commitment to the firm’s fourth buyout fund.

Meanwhile, Bain Capital recently proposed temporarily waiving management fees for investors in its private equity funds, with the firm to recoup the fees when investments are realised. Such moves have perhaps not so coincidentally come as LP representatives such as UK-based Private Equity Investors Association (PEIA) and Institutional Limited Partners Association (ILPA) are increasing their profile and being more proactive in pushing their members’ concerns.

The president of a major fund of funds says that he is aware of at least one large state pension that has responded to requests to extend investment periods by telling GPs that, while they understand the need for more time to put money to work, they also want to discuss a reconsideration of certain terms in the LP-GP agreement. More firms will likely have to confront such issues sooner rather than later, but in seeking to concede ground there are a couple of relatively low-cost moves they could make to generate goodwill from LPs.

For one they could deal with “stale” funds that are well outside their commitment periods and are highly unlikely to ever be called fully called. Canceling or cutting such undrawn commitments should be a relatively easy give for GPs as they are not generally charging management fees on these funds.

Secondly, GPs that have a mature portfolio with a large amount of public stocks missed an opportunity last year to distribute those at what turned out to be attractive prices. The same managers might want to consider distributing those securities in this environment rather than holding on to them and hoping to wring out every last nickel of appreciation.