GPs increase ‘skin in the game’

Investor pressure is convincing GPs to increase the amount of money they co-invest, according to an industry panel.

Private equity fund advisors are significantly increasing their personal fund commitments in response to investor demands, according to an industry panel assembled by law firm Proskauer, which expects the trend to continue into 2014.

Proskauer examined in-house data on 25 fund managers that closed funds in 2013, noting that in the EU the average GP commitment rose from 3.1 percent to 3.48 percent compared to these GPs’ last fundraise. In the US the increase was more noticeable, trending up from 2.02 percent to 3.08 percent.

How much GPs commit to their own funds proved a top concern for investors in 2013, said during the event Proskauer private investment funds practice co-head, Howard Beber, and Proskauer funds partner, Nigel Van Zyl.

The findings are backed by a recent LP survey conducted by placement agent Probitas which discovered that 60 percent of investors feel that GP “skin in the game” is one of their top three priorities when making fund commitments. The other two most important factors proved to be how carried interest is distributed between the fund managers and management fee levels.

Beber also noted more intense negotiation around GP commitments, adding that LPs are working harder to feel comfortable that fund managers have sufficient capital at stake. A challenge for some fund managers, who don’t always have sufficient carried interest streams to put on the line, is finding enough money to contribute a higher percentage of the fund total, he noted.

LPs are also becoming more cautious of the way GPs co-invest, preferring the commitment be made in cash, although for fund managers without significant carried interest in their accounts a financing arrangement is often an option.

“While LPs prefer to see the GP commitment in the form of cash, a commitment that requires some form of financing would not be a deal breaker, particularly if this is an increased commitment from the prior fund,” said Connor O'Keeffe, director in Credit Suisse's private funds group.

Another route available sees fund managers concede a portion of management fees to finance the GP commitment, but investors feel this is not the right use of a management fee. However, some investors said this management fee waiver is acceptable if it translated to a higher GP commitment into the fund.