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Keeping the lights on

What will the credit crisis mean for GPs in terms of budgeting and management?

Budgeting and GP management are two especially important issues right now because GPs everywhere are currently pondering how to manage their firms through the uncertain times ahead.

As a participant in the private equity industry, I'm sure you've been getting variations of the same basic question from friends and family members outside of the industry: What will the credit crisis mean for you?

My response has thus far been that private equity (and therefore media groups that provide top-quality information to private equity) is in a better position than many other types of financial businesses by dint of its long-term structure. Funds are raised with capital lock-ups of 10 years or more, and predictable fees are charged against those funds. This structure isn't in place simply because GPs are a crafty bunch, but because the ability of a private equity investment to succeed is dependent upon the sponsors of the deal having long-term resources and incentives to see the investment through to exit.

It's true that, thanks to management fees, even a series of deal blow-ups won't spell doom for the sponsoring private equity firms. But there are baleful trends in motion that could indeed force firms and their CFOs to revisit budget forecasts.

For a combination of reasons, fundraising is set to dramatically slow. This will delay the arrival of the next fund for many private equity firms (and delay the associated fees) and will also mean that in many cases the next fund will be smaller than the previous one.

Of greater concern is another trend: as reported in the November issue of sister publication Private Equity International, some GPs will come under pressure to decrease the size of recently raised funds because their LPs are increasingly nervous that they won't have enough cash for capital commitments going forward.