Institutional investors speaking at industry conferences tend to discuss (or be asked) what they’re looking for in GP relationships and where they next plan to deploy capital. So it was a slight departure to hear an investor panel focus on how LPs can make themselves more appealing to fund managers at this week’s Women in Private Equity Forum in London.
It’s of course against the backdrop of a booming fundraising market: 56 percent of funds closed in the past three years were raised in less than a year, while 32 percent in fewer than six months, according to PEI data. It’s clear in this environment that top-quartile managers can more easily dictate terms – witness Warburg Pincus’ recent one-and-done $12 billion close that was oversubscribed and offered no sweeteners, or Advent International’s doing away with a hurdle rate on its latest fund.
“It truly is very competitive,” Narcisa Sehovic, senior investment manager at Aberdeen Asset Management, told delegates, explaining that GPs were starting to compile ‘pre-DD’ lists of preferred LPs. “Those who have outperformed through the crisis and are still outperforming … they’re dictating the terms.”
However, the sentiment from LPs at the forum was that this wasn’t necessarily a bad thing. Instead of feeling powerless, they talked of the need to focus on a partnership model and relationships that go beyond writing a cheque, of the need for mutual respect between LPs and GPs and an appreciation for what each can add. Fund managers mustn’t be treated as though they are “coming begging for money”, as Adveq chief executive Sven Lidén recently put it to PEI. Likewise, LPs shouldn’t be treated as glorified cash machines, but strategic partners, forum speakers suggested.
Investors seeking access to the hottest funds must position themselves as “the partners of choice”, Deepa Devani, vice-president at GIC Real Estate, told delegates. This means being seen as a reliable, long-term source of capital that is not “flippant in the market and just chas[ing] valuations”.
As LPs jostle not just for allocations within funds, but also for blue-chip co-investment opportunities, it helps to be able to bring something extra to the table, often in the form of sector expertise, industry contacts or a viable exit strategy.
While this can be viewed positively – as one placement agent put it, it puts the ‘partner’ back in limited partnership in a pleasing way – it’s hard to know whether standing out as a ‘partner of choice’ is feasible for smaller LPs that lack the scale or resources to compete with larger peers.
For those investors, diminishing wiggle-room on fees and the need to bring significant value-add could well limit their access to top-tier funds. It remains to be seen whether this evolving LP-GP dynamic leads to a bifurcation within the LP community – of those deemed top quartile-worthy and those less favoured – and thus prompts a greater reliance on funds of funds or even a move towards other evolving structures.
However, a push for LPs to bring not only capital but relevance both to the manager and their fellow fund investors, be it industry expertise or alignment on issues such as social impact, can only lead to stronger GP-LP relationships and ultimately benefit the industry as a whole.