Last among equals

It’s yet another sign that the balance of power has shifted to LPs from GPs – at least one new US fund is being structured whereby the capital commitment of the GP is subordinated to that of the LP.

With each swing of the economic pendulum, so shifts the balance of power between GPs and their investors.

During the recent boom years, GPs held many of the cards as institutional investors and individuals clamoured to get a piece of the alternatives – and with it private equity real estate – action.

Now as the pendulum swings back in favour of investors, we are seeing GPs increasingly agreeing to renegotiate fund terms for existing vehicles and offer more concessions for those vehicles currently in market.

Already this year we have seen some major real estate players, such as Westbrook Partners, give LPs the chance to reduce unfunded commitments in an effort to ease their liquidity concerns.

However, PERE has learned that some GPs are willing to concede even more power as they search for those illusive capital commitments.

According to one funds of funds manager we spoke with, a real estate GP group whose capital commitment to a new fund equals between 20 percent and 25 percent of the total has agreed to essentially be treated as a second-class citizen within their own fund.

Not only will LPs benefit from preferred return and catch-up provisions granted to limited partners and borne by the fund manager, but within the fund itself, the capital committed by the GP is subordinated to capital committed by external LPs.

“It’s very much about ensuring LPs get their money and returns back first,” the funds of funds professional told us. “I’ve not seen that before.”

GPs are apparently prepared to go the extra mile to attract LP dollars now that said dollars have become quite scarce.

Issues such as catch-ups, side letters, claw backs and key-man provisions are all things GPs need to be ready to give ground on. However it could also be the case the important economic terms are going through a sea change in favour of the LP, and the change may end up establishing long-term market norms.