GPs putting more ‘skin in the game’

A few general partners are putting their money where their mouth is – boosting commitments to their own funds well beyond the average 2 percent that is the industry norm, according to limited partners who have recently been pitched fund offerings.

CCMP Capital Partners, which is targeting $3.5 billion for its third fund, is understood to be kicking in a 6 percent commitment; Augusta Columbia Capital, a newly formed firm that is targeting $750 million for mid-market technology investments, is putting up a 10 percent commitment and Bain Capital, which is trying to raise $6 billion for its Fund XI, also is injecting 10 percent of its own capital into the fund.

Another firm in the market with a higher-than-average GP commitment is Apax Partners, which has pledged a 5 percent GP commitment to its Fund VIII targeting €9 billion. Gores Group last year closed its $2.1 billion Fund III with a 5 percent GP commitment, and earlier this year closed its $300 million debut small-cap fund that also has a 5 percent commitment. LBO France earlier this year closed its second “Altercap” credit fund on €200 million, into which the GP contributed 7 percent.

A significant GP commitment is viewed as a manager putting his or her own capital at risk, thereby increasing the alignment of interests with LPs. Trade organisation the Institutional Limited Partners Association advocates the GP having a “substantial equity interest in the fund to maintain a strong alignment of interests with the limited partners”, according to the group’s best practice guidelines.

Indeed, GPs have been feeling pressure from prospective investors to come up with meaningful self-investments. A survey published earlier this year by Investec revealed a large majority of the 88 UK-based dealmakers who participated said there is an expectation amongst LPs for GPs to put more “skin in the game”.

However, 78 percent of the respondents revealed challenges to fulfilling this request. Roughly a third (35 percent) said they had insufficient finance availability to contribute more; one quarter said they were reluctant to overexpose themselves to any one investment, and 18 percent cited maximum fund contribution thresholds as a reason for not increasing their personal fund commitments.

These challenges might be compounded by LPs’ desire for the GP commitment to be in the form of cash up front, rather than a contribution that accrues over time. ILPA, for example, recommends the GP commitment be made entirely in cash as opposed to being funded through a waiver of management fees – a practice that many firms, including Bain Capital, have used in the past. In that case, LPs still pay the management fee, but it flows into the fund and contributes to the GP commitment.

Cash up front could prove challenging to newer firms with GPs who haven’t amassed wealth through carried interest.

Augusta Columbia's and Gores Group's commitments are in cash, according to sources familiar with the firms. It's not clear how Bain's, Apax's, LBO France's and CCMP’s commitments to their funds are structured. The firms did not respond or declined to comment.

Still, LPs expect a willingness on GPs’ part to put their own capital at risk, and they want their pledge to be straight from managers’ pockets.

“I like to see [GPs] go above the average,” said Anna Dayn, head of Dayn Advisors, an LP consultant. “Above 2 percent is really good, but you have to look at the shape of that GP commitment. Many groups will claim a high GP commitment but it’s something that aggregates over time as they achieve management fee and as management fees come back in as GP commitment.

“Cash up front is best,” Dayn said. “You really have to have your money alongside the investors. It makes everyone feel they’re in it together.”