Emerging concerns

While the guidelines were originally designed more for global private equity investors in the US and Europe, the push for the adoption of the investor friendly ILPA guidelines is spreading into emerging markets as well. 

That’s one of the messages that attendees heard Thursday during the PEI Media Emerging Markets Investor Forum in New York. During a panel discussion on aligning GP/LP interests, MetLife Investments managing director Michael Mazzola – who helped craft the terms and conditions proposed by the Institutional Limited Partners Association – said that the most relevant guideline for emerging market GPs would be to have enough “skin in the game”. 

“The challenge is, does the manager have meaningful upside both through the carry and through their actual investment, and also meaningful downside if the investment doesn’t work?,” he said. He added that while partners in a new fund might not have the wherewithal to put in significant capital up front, as a general rule his firm is pushing general partners to put more of their net worth in a fund.

These comments indicate that even though the ILPA guidelines were announced only last September, their impact is increasingly being felt around the globe. Several GPs have said they have either seen or heard about limited partners demanding terms such as a step-down structure in the management fee and clawbacks gross of taxes paid. Particularly for a newer manager, even agreeing to most of the ILPA principles will not be enough – all the boxes have got to be checked or LPs won't commit. 

In addition to the question of how much equity a GP should commit, a poll of attendees at the conference showed that management fees are seen by both LPs and GPs as the biggest area of contention. It’s also an issue that has affected even the biggest of firms, as demonstrated this week when The Blackstone Group agreed to lower the management fee on its debut infrastructure fund from 15 percent to 10 percent.

Blackstone has had an uncharacteristically tough time raising the fund, which recently held a first close on $200 million. When even the biggest firms are making concessions to their LPs, new managers in untested markets had better be prepared to give ground.