The demands of private equity investors have been widely reported since the industry’s lack of liquidity finally gave LPs the upper hand over their GPs. Attempts to secure much-needed capital have led many firms to concede to lower management fees, entirely offset transaction fees and offer greater co-investment rights.
But GPs would highlight that long-term relationships need continuous nurturing, so aside from money, what do buyout firms want from their customers?
1. DON’T BE A STRANGER
The chief executive of a European venture firm: “The phone works both ways and sometimes it would be nice if the investor picked up the phone just to talk to the GP instead of sending emails demanding this information and that information. They want us to call them all the time and we do that but it doesn’t work both ways. This is a partnership and they’ve forgotten that.”
2. SO… ARE YOU A LOOKING FOR COMMITMENTS?
Enrique Cuan, managing partner of Mercury Capital Advisors: “A GP’s favorite answer is always ‘yes’. A GP’s second favorite answer is always a quick ‘no’. In an environment where LPs know that fundraisings generally take 14 to 18 months their natural tendency is to preserve as much optionality as possible and not make a decision until they absolutely have to.
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“GPs are generally willing to meet most investors – except the ‘data miners’. These are LPs that don’t disclose that they’re out of money or that their allocations have been cut. To stay relevant and informed they’ll engage with as many managers as possible. They’ll even go so far as to make a few cursory diligence requests and schedule follow up calls with the GP to create the perception that genuine interest exists. Inevitably the conversation leads nowhere. Nothing frustrates a GP more.”
Buchan Scott, a partner in the investor relations team at buyout firm Duke Street: “The greatest thing is communication by investors, if they could be a bit more upfront about what they are thinking and what they want. They don’t always tell it as it is. It would be really good to get more feedback from them on what their thoughts are – good or bad, frankly.”
3. THE DATA BURDEN
Jérémie Le Febvre, founder of consultancy TBG Capital Advisors: “While the PPM and the due diligence documents generally contain most answers, most LPs have precise questions in mind which they will ask anyhow.
“We’re still in an environment where GP reporting has not been harmonized and LPs have their own way of being reported to. Some [investors] use solutions like eFront, for example, but some have their own proprietary databases. Some LPs will even send templates of Excel sheets to show how they like being reported to. Hopefully, such behavior is marginal because if every LP had its own idea on reporting, GPs would need to hire an entire team solely to fulfill that duty.”
Armando D’Amico, managing partner of placement agent Acanthus: “[GPs] try to put as much information as possible in the data room so they prepare the ground for [investors] to have everything. Some of the smaller and more nimble and less bureaucratic LPs like that. But some of the bigger ones ask you to recast everything into their formats. Somebody’s got to do the work, the GP may be under-resourced and they don’t fill in all the blanks.”
4. BE PROACTIVE
Stephen Robinson, a partner at law firm Macfarlanes: “There’s a feeling some LPs are under-resourced for the amount of work they’re trying to do. Clearly they are under financial pressure as much as anyone else and they are being reactive to events instead of being more proactive.”
5. BESPOKE AGREEMENTS
Jeremy Bell, a partner in the fund formation team at law firm Ashurst: “All too often GPs simply receive an untailored side letter (a separate contract between LP and GP supplementing the terms of a fund) from an investor with the statement that it is ‘our standard form’, but with no attempt having been made to reconcile the terms of the side letter to the fund in question. Fund terms are bespoke and a standard form side letter rarely works without some adaption, and often many of its terms are either already covered or irrelevant. The GP and its lawyers need to ensure the final letter works so end up having to try to work out what the investor really wants.”
6. STAY RELEVANT
A London-based placement agent: “Some GPs have requirements or are asked for information that can be perceived as inappropriate or irrelevant to the ultimate objective of what diligence is all about – a line of questioning that first looks like it doesn’t have any relevance to a diligence process, about something that may have happened two funds ago.”
7. JET LAG
Le Febvre: “Increased travelling is not the solution to a more global fundraising environment. Thankfully, only a minority of LPs require visiting as a condition before doing any work, which is inefficient overall. When you consider the technology today to facilitate dialogue between two professionals, the travel rates or the frequency we’re speaking about, excessive travelling is complete nonsense. A lot could be done over video conferencing and be much more efficient, rather than having investment professionals going right across the globe.”
8. NO FREE LUNCHES
Sam Kay, a partner at law firm Travers Smith: “All investors seem to want a seat on the advisory committee these days. For a GP, that is fine and a good way of strengthening relationships with investors. However, I think investors have to accept that there is a responsibility with the role and sometimes they may be required to make a decision, for example on a conflict of interest. GPs much prefer investors on the limited partner advisory committees that are engaged with the process rather than enjoying the chance of having another knees-up.”
9. SUPPORT ME…
Kay: “One of the buzz words over the last few years to come out of the investor community is ‘alignment’. That word is often used when discussing the commercial terms of a fund. For GPs that word is also important; the alignment they want from investors is that the investors will back the GP, even in the challenging times. Private equity is a long-term asset class and GPs want a long-term relationship with investors, through a number of economic cycles and fund vintages.”
James Coleman, a partner at advisory firm Probitas Partners: “[GPs want] confidence over an ongoing relationship with the same individuals. Someone who has the potential to be a true partner and therefore be understanding and supportive in certain situations.
“Be accretive, through association, to the GP’s own brand. Be a gateway to other high quality LPs.”
10. …AND CONGRATULATE ME
The chief executive of a European venture firm: “When we have done big exists and done things that were great, we haven’t had a single phone call saying ‘well done’.”
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