Whose alignment is it, anyway?

As the unwieldy mass that is private equity moves in fits and starts toward the promised land of ?institutionalization,? it is often said that the investment partnerships at the center of the industry are showing greater alignment of interests. This may be true, but there is a counterforce to this called ?supply and demand.?

Certainly some terms and conditions in private equity funds have, from an LP's perspective, become friendlier. Deal fees are now heavily shared with LPs, meaning that GPs have greater incentive to profit from improving a company, not just owning it. Most IRRs are now based on aggregated deal performance, meaning GPs feel pain for bad deals almost as much as LPs do.

Some of these alignment trends can be seen in the wave of coinvestment fundraising activity now taking place. GPs say they are offering LPs greater opportunities to co-invest in large deals in part because this gives their investors a break on fees and doesn't encourage GPs to put all that capital to work too quickly. But the counterforce mentioned above comes into play here, as well – namely, supply vs. demand.

Large funds are being raised now by a fortunate few private equity firms because large deals are said to be available, but also because limited partners are flush with cash and in love with the recent performance of large funds. GPs, loathe to turn down any opportunity to grow assets under management, are better harnessing co-investment capital ?while the getting is good,? according to a source I spoke with for this month's cover story about coinvestment funds. In locking up long-term capital during a frothy market, GPs are also ensuring the best terms for themselves in coinvestment situations – guaranteed capital, management fees paid on invested capital and, of course, carried interest. Through the smoke of the raging fundraising bonfire, it's hard to judge whether this all spells alignment of interests or a severe imbalance between demand for and supply of quality GPs.

Enjoy the issue,

By David SnowDavid.s@us.investoraccess.com