LPs prize durable GP ties

Investors want sponsor relationships that go beyond specific funds, while prioritizing relevant information at meetings. These key takeaways were shared by LPs at affiliate title Private Equity International’s Investor Relations, Marketing & Communications Forum in New York this month.

An LP with an asset management firm said she will consider GPs on a long-term basis even if it declines to commit to a fund in the short term.

“We are happy to engage, and it doesn’t necessarily mean that we’ll commit in the next fund over the next three months, but it’s the beginning of a relationship-driven approach and we tend to source for the long term,” she said. “We’re really a relationship-driven partner and we want to be there. Unless a thesis changes or something doesn’t work out, we tend to do our underwritings also looking out fund generations ahead.”

An investor from an outsourced CIO provider said that re-upping with GPs factors into its initial decision-making processes. She noted this approach gives her firm a chance to get comfortable with sponsors that it declines to back for now.

“When we underwrite a fund, we always have this conversation: ‘Do we see ourselves re-upping with them two or three times?’” she said. She added that the idea is to give them conviction as to whether the opportunity is a one-off, or if rather, “this is an enduring firm that we are comfortable backing over the long term as they build out their vision.’”

Her firm also leverages its established sponsor ties to find new GPs.

“With our existing managers, we are always in constant dialog and just ask them, ‘if you hear of anyone else you really respect in your field, feel free to let us know,’” she said.

And the investor with the OCIO firm noted that her firm is interested in GPs that were involved in the same successful deals as its current sponsors.

GPs may also want to consider how their fund sizes stack up with prospective investors’ future plans. A pension LP whose organization is dealing with fast growth noted the firm looks for GPs that can scale to accept bigger ticket sizes.

Ties to existing sponsors

But successfully obtaining commitments is only part of the long-term battle.

“We will do re-underwrites for every re-up, and that entails everything from DD meetings to 10-plus reference calls of broader stakeholders, et cetera,” said the asset management LP.

This investor said her firm eyes factors like team departures and how GPs paced their investments of capital.

“If you invested your fund completely in 2021, we’ll take a very close look at what the rationale behind that was and how the IC discussions went,” she said.

Another challenge emerges when an LP faces re-ups from sponsors that lack sizeable realizations from their earlier funds. The pension investor noted that his organization has grappled with this problem in recent years due to an atypical deployment cadence.

This leaves the institution with a dearth of fund performance data to use for re-underwriting.

“When funds come to re-up, we’re looking at a very young and unrealized portfolio, so we don’t really have an additional answer on the track record part of the equation,” the LP noted.

The pension adapts by focusing more on its GPs’ integrity track records. This means finding out if sponsors lived up to the institution’s partnership expectations, such as whether the GP allowed co-investment, and whether they were a good strategic partner.

Communication quality, not quantity

And though LPs have demanded more and more contact with their GPs, some at the conference expressed a desire to pull back from unstructured meetings, at least.

“It’s actually really intense, but every meeting needs a purpose and an agenda,” the pension LP noted.

The asset management investor suggested that GPs do check-in e-mails and floated six-month periods to re-connect. She also voiced interest in getting materials from sponsors, such as thematic research.

The “cut to the chase” mentality extends to annual general meetings, with LPs preferring events that serve unique purposes and aren’t lavish.

“We want real insights,” the pension LP said.

He also cautioned against scheduling LPAC meetings that are too close to AGM dates and have substantial overlap of material that is presented.

The OCIO investor said GPs should share portfolio presentations in advance so that LPs can take notes ahead of time and then use the AGMs for in-person follow-up conversations.

And a desire for “substance over style” includes choice of meeting locations.

The asset management LP voiced displeasure with AGMs being held in places resembling fancy leisure spots, preferring to meet in bigger US cities unless the GP is based in a smaller locale.

“More and more GPs have started to do a more resorty type of AGM, like going to Scottsdale or going to Boulder, and we’re not big fans of that,” she said.