News & Analysis

Mind games creating mistrust in LP-GP relationship

GPs are suspicious of LPs holding meetings despite no genuine intention of investing in their fund while LPs are afraid of hurting their ego by being honest about a rejected commitment, new research shows.

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The level of mistrust and suspicion between GPs and LPs is potentially damaging relationships, according to a survey from the International Administration Group, a private equity fund administrator, and Thompson Taraz, a UK fund administrator for lower mid-market private equity and real estate fund managers.

The survey, of 101 GPs and 128 LPs, revealed that almost two-thirds of LPs have taken a meeting with a GP despite having no intention of investing in the GP’s fund. Virtually all GPs suspect this occurs, but said in the survey that “it was revealing to see the extent to which LPs confirm it.”

More than a quarter of LPs have also requested sensitive data only to benchmark other funds they are interested in or have asked for additional data that they did not use. Again. the vast majority (91 percent) of GPs expect LPs to make these requests.

Furthermore, 84 percent of GPs suspect that LPs have misled them with regards to why they did not invest in their fund. One out of every six LPs admit to lying to a fund manager about why a fund commitment was rejected. “Sometimes GPs’ egos are so inflated that you cannot give them the true reason for passing; they may write you off completely,” said in the survey a senior managing director of a North American insurance group.

LPs also say they’re unhappy with the quality and timeliness of GPs communications like investor reporting or updates on the firm’s internal developments. More than half of LPs have put a manager on review owing to poorly communicated personnel changes; 42 percent have done so because of inaccurate or incomplete reporting; and 40 percent because the GP was slow to respond to enquiries.

“If we can put a man on the moon in two days, what’s the hold-up?” a director of a US-based LP said in the survey.

However, LPs are struggling to get this message across. A strong majority (92 percent) of GPs believe that they are giving their LPs all of the information they need. In fact, less than one in ten GPs recognizes that there may be a problem with their communications.