LA Forum: Managing LP expectations

Although investors remain in the driver’s seat when negotiating with managers, there are limitations to what they can get.

Investors have many requests when discussing a new commitment to a manager, but some wishes can’t be granted, even in a difficult fundraising environment.

“Some of the oddest things that I’ve seen have been key man [requests] by our clients that we just didn’t think worked,” said Roy Schneiderman, principal at Bard Consulting, speaking on a panel at the PERE Global Investor Forum in Los Angeles last week. “They were asking for the wrong people or the wrong groupings.”

Other requests, however, never even make it on the table. “Sometimes, the clients want a level of control that just isn’t going to happen, such as control over financing or over the timing of sales,” Schneiderman said. “Sometimes people forget that [such control] can only work in a club or a separate account setting.”

Lori Campana, managing director at Monument Group, noted that it’s not unusual for smaller investors that can invest only $3 million to $5 million to still want a board seat. “If they have a presence in the industry and we think that they are a valuable investor, we advocate for them to be on the board,” she said. “When you have a limited number of board seats and a large group of large investors, however, that becomes a hard thing.”

At the same time, investors may be overlooking certain matters in their discussions with managers. Richard Magnuson, executive managing director at GI Partners, argued that there should be more focus on the use of leverage in investments and related return expectations. “If you’ve got a commingled fund and you’re trying to hit a certain target investing in an asset class that can characterized as core, there’s no way you’re going to hit your 20 percent IRR and your 2x multiple unless you use lots of leverage,” he said. “I just think there needs to be a discussion about what the expectations are and what the returns really should be.”

Meanwhile, Schneiderman noted that investors should be more focused on the economics and operations of both funds and general partners, as well as the transfers of costs between entities, including single-purpose entities and underlying ventures. “I think that’s an area where a lot more attention should be paid,” he said.