News & Analysis

Terminal conditions

A recent survey shows that with more LPs deciding not to re-up with existing managers, GPs will need to take concerns over terms and conditions – including the new guidelines by ILPA – more seriously.

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The shifting pendulum is a metaphor that is often used to describe the GP-LP relationship in the current environment. And as two stories this week again demonstrate, that pendulum has decisively shifted in favour of limited partners. 
Jennifer Harris writes in “Development finance LPs back ILPA guidelines”, a group of development finance-focused limited partners – including the Asian Development Bank, Belgian Investment Company for Developing Countries, the UK’s CDC Group and France’s Proparco – have become the first significant emerging markets investors to throw their support behind the recent Institutional Limited Partners’ Private Equity Principles.  
Among ILPA’s proposals are that management fees should cover reasonable operating expenses of the firm and not be “excessive”; as well as that LPs should have stronger governance rights and GPs should be more transparent about fees, carried interest profits received and portfolio company performance. 
While GPs during the boom times may have had an easier time brushing off such concerns, that is no longer the case, especially as a new survey from Coller Capital showed that 79 percent of LPs will refuse to re-up with exiting managers due to dissatisfaction with current terms and conditions, as Kevin Ley writes in “LP term concerns will prevent re-ups”. That figure was 22 percent higher than last year, while the number of respondents who said they wouldn’t re-up due to transparency concerns rose by 37 percent this year.
When ILPA first announced the guidelines in September, one US managing director predicted to PEM that when the – here’s that word again – “pendulum” swung the other way, LPs would be crawling over themselves to get back into funds no matter how onerous the terms. He also said little would happen unless big-sized investors took the lead.
While that has not quite happened yet, the fact that 70-some organisations had already signed on to the ILPA proposals before the group including the CDC and Asian Development Bank adopted them should be cause for concern for managers. And while the pendulum may shift back in the future, for now GPs need to deal with the fact that private equity is a harder sell internally for investors.
As the CIO of Coller Capital said following the release of the survey, “GPs now have more to prove.”