Fund managers are in a dilemma: investors want them to take greater personal stakes in their own funds, but many are unable or unwilling to do so, according to Investec, which surveyed 88 UK-based private equity dealmakers on the matter.
The vast majority of fund managers (81 percent) said there is an expectation amongst investors for GPs to put more “skin in the game”.
However, more than three quarters (78 percent) of respondents cited different obstacles preventing them from meeting that demand. Roughly a third (35 percent) said they had insufficient finance available to contribute more; one quarter of GPs said they were reluctant to overexpose themselves to any one investment; and 18 percent of respondents cited maximum fund contribution thresholds as a reason not to increase their personal fund commitments.
GPs’ fund commitments vary, but normally sit in the 1 percent to 2.5 percent region depending on the size of the fund and liquid net worth of the partners. LPs prefer sizeable GP commitments so that the individuals in control of the fund have more to lose as well as gain.
“We have recently seen GP commitments of over 10 percent in certain funds, which has proven extremely popular with investors,” said Simon Hamilton, head of Investec's fund finance group, which provides GPs with loans to finance personal fund contributions.
The banking group said the demand for higher commitments has resulted in a threefold increase in lending to GPs over the year.