BVCA Summit: LPs weigh in on GPs’ product line extensions

Investors generally welcome the expansion of product offerings, but are wary of misalignment and conflicts of interest in deal allocation.

The rising trend of GPs moving away from a monoline product strategy is here to stay, a panel heard on Wednesday.

Speaking at the virtual BVCA Summit 2021, Joana Rocha-Scaff, managing director at Neuberger Berman, noted that the trend is becoming more prevalent in the private markets industry.

BVCA Summit 2021 LP Panel
BVCA Summit 2021 LP Panel

“It started with the large-cap [managers]; you probably can count with your fingers in one hand how many of those large-cap firms are still mono-product. Most of them have at least two funds,” she said. “But it’s very much propagating. We see mid-cap managers, venture growth [GPs] as well looking to diversify and to follow deals or capture ancillary dealflow. They may see a sector or do minority or majority solutions.”

Vicky Williams, a senior portfolio manager at Coal Pensions Trustees Investment, noted on the panel that product line extensions “make a lot of sense” and “make life easier”, especially for LPs with smaller internal teams like theirs that need to consolidate workloads.

That said, GPs having multiple product offerings may also result in potential conflicts of interest.

“Economic alignment is a question we ask ourselves at investment committee,” said Delaney Brown, managing director, private equity funds and secondaries at CPP Investments. “If you went back and there was a buyout fund and there was a monoline strategy, you could clearly argue that the largest part of economic incentives came from carried interest.

“As these firms have gotten larger and larger, the value of the management companies has increased, the fee stream coming in from multiple products has become diversified and varies. As we run the models, it becomes harder and harder for us to look at certain GPs and say carry through the flagship fund is the primary wealth generator for the individuals at the firm.”

Brown added that firms’ reliance on an individual or small group of individuals is also a concern. “There’s only so much time in the day for any individual to be involved in so many deals. Many of these platforms have multiple investment committees. And if it’s the same small number of people piling on each of those deals, at what point is it just too much pressure on a small group of people to make all the decisions?”

Rocha-Scaff also noted that there are potential conflicts in terms of deal allocation.

“This needs to be very clear. We understand and respect the desire to proliferate product solutions, to capitalise on the competitive advantages and dealflow and resources that the GPs have. But it’s very important that when these offerings are launched there’s discipline and thought into how things are going to be executed.”

However, these concerns wouldn’t deter LPs from investing in such managers if there’s outperformance, added Coal Pensions’ Williams.

“At the end of the day, it’s got to be about the returns,” she said. “And if I’m still getting the net returns that I need to hit my benchmarks and keep my trustees happy, then absolutely.”