Received wisdom is that limited partners are cutting down on their general partner relationships.
This is certainly true of some. Much has been made about the California Public Employees’ Retirement System’s efforts to do so; the $362 billion public pension has in recent years attempted to cut its portfolio back to a target of 30 “core” managers to reduce complexity and the cost of managing the portfolio. In 2014 it had around 110 GP relationships. At this point in time the figure is more like 90.
But more than half (53 percent) of limited partners intend to increase their fund manager relationships over the next 12 months, according to PEI‘s LP Perspectives Survey 2019. An additional 30 percent will opt to maintain their current number of relationships, while just 11 percent will actively reduce them.
“It’s a cycle; there are periods when LPs retrench the number of GP relationships that they have and then gradually increase them again if some of the existing managers don’t perform and need to be replaced,” Brad Young, says head of global advisory services at Pavilion Corporation.
“A few years ago I’d say all of them were in some form of consolidation of their GP relationships, and if a group retrenched they might now need to expand or increase their PE allocation.”
Trimming the fat has its advantages. Time is a precious commodity for most LPs, making the ability to commit to multiple strategies and asset classes through fewer relationships invaluable for certain institutions, Sweta Chattopadhyay, director, private markets at LP advisory firm Bfinance, says.
This is easier said than done, says Jim Strang, head of EMEA at Hamilton Lane. “There’s more transparency in private equity today, which makes it easier to identify winners. It’s quite difficult to access the most attractive funds because of the dynamics of supply and demand, so trying to increase your aggregate exposure while focusing on fewer managers is a challenging game to square.”
More than one-quarter (28 percent) of LPs have had their allocation scaled back in “most of their chosen funds” in the last year due to excess demand and a small minority (4 percent) have been unable to secure an allocation in the majority of their preferred vehicles.
LPs must also contend with managers that are looking to cultivate their investor base, Strang notes. “What’s happened on the GP side is they’ve become a lot more thoughtful about the kind of investors they want. If their strategy map for the investor base has got some combination of investor-type and geography, it means there’s going to be some crowding out.”
Returning to CalPERS: the pension plan’s investment advisor Meketa said last year that the Core 30 plan had failed to deliver its intended improvements due in part to difficulty in deploying larger amounts of capital with fewer managers. It will most likely revise the number upwards, but not to previous levels.
Capital is flooding into private equity. Firms raised $266 billion in the first three quarters of 2018, having collected a mammoth $464 billion last year, according to PEI data. Distributions have also significantly outpaced private equity capital calls since 2013, according to eFront data, making it a struggle to put enough capital to work.
Fewer manager relationships may be desirable but may also be untenable.
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