Tensions in the relationship between LPs and GPs – one of the major industry stories over the past few years – will not be as significant as the “fragmentation” of the LP universe into haves and have-nots, according to Mario Giannini, chief executive officer of consultancy Hamilton Lane.
Giannini, who spoke at the Dow Jones Limited Partners Summit last week, said the “fight” between LPs and GPs has largely played out with the gradual acceptance of the guidelines put forth by the Institutional Limited Partners Association. The tough fundraising environment has also forced many GPs to be cooperative in negotiating with investors on terms and rights.
However, the rise of customised separate accounts between large LPs and GPs – like that formed between The Blackstone Group and New Jersey’s state pension system – is an example of the shifting dynamic within the LP community. Big, rich organisations enjoy better economics and more options in their GP relationships than smaller institutions – this has always been the case in the industry but has been highlighted recently by several blockbuster partnerships.
They want lower fees, they believe they don't really need [GPs]; that world is moving away from the traditional partnership structure where you pay 2 and 20. The rest of the LP universe fragments from there.
This shift partly reflects the changing nature of the industry’s most significant investors. Some of the largest LPs in the market today – specifically sovereign wealth funds – were not even LPs several years ago, Giannini said. Those institutions have a different view of their role in the partnership, he said.
“They want lower fees, they believe they don’t really need [GPs]; that world is moving away from the traditional partnership structure where you pay 2 and 20,” Giannini said, also using the model of big Canadian pensions moving more into direct investments and away from fund commitments as an example. “The rest of the LP universe fragments from there.”
During a separate panel at the conference, Marc Friedberg, managing director in private markets at Wilshire Associates, said the LP community in general has become more sophisticated, leading many institutions to think about taking a more direct approach to private equity.
Sources have said in prior interviews that smaller LPs have been asking questions – and quietly grumbling – about the formation of customised relationships with only certain investors. So far, though, it’s been more of a “whisper” campaign among smaller institutions, Giannini said.
“It’s something we’ll all have to watch – what was formerly a fairly unified LP community fragmenting into how they want to invest in private equity,” Giannini said.
For GPs, the issue becomes one of favoring certain LPs at the risk of alienating other investors or potential investors in funds, he said.
“It used to be that one way to service all the LPs was to bring them to the annual meeting, the advisory meeting, call a few of them. Now you have very different requirements from each group … you may be saying something that makes [one] investor happy and alienating [another investor],” Giannini said.
The Blackstone Group wants to build a family of customised accounts with large institutions, with commitments totaling about $5 billion. The firm formed a $1.5 billion partnership with New Jersey’s state pension last year, and a $500 million separately managed account with the California Public Employees’ Retirement System earlier this year. The investment mandates in those accounts are flexible, allowing the firm to allocate the money to opportunities across asset classes.
Last year, the Teachers’ Retirement System of Texas formed accounts with Kohlberg Kravis Roberts and Apollo Global Management, pledging $3 billion to each firm for investments cutting across asset classes.