Friday Letter: The top 50 LPs

Our LP50 ranking highlights how capital flows to private equity have changed since the crisis

Who are the best LPs in private equity? It's a question we often ask GPs – and as you’d expect, we get a lot of different answers. Different GPs look at it in different ways, depending on how big they are, what their strategy is, where they are in the fundraising cycle, and so on.

Who has the biggest allocation? Who's the best resourced? Who's the most innovative? Who’s the best connected? Who adds the most value on the advisory board? Who takes decisions fastest? Who’s most willing to take risks? Who stays the course during the tough times? Who’s most hands-on? Who’s most hands-off? Who cares most about co-invest? Who cares least about co-invest? These are all important and valid questions that help GPs frame their thinking about their LP base.

However, for our annual LP50 list, which we published yesterday (and also appears in the July issue of the magazine), we’ve chosen to rank LPs according to a simple criterion: how much money they've committed to private equity across the last five years (this being a decent proxy for the fundraising cycle). In other words: these are the 50 institutions that have invested the most money in the asset class since the crisis. As an indicator of commitment and steadfastness, that’s pretty hard to beat. And it provides an answer to arguably the most important question for any manager, especially in the current climate: who’s most likely to write me a cheque?

Are the best LPs necessarily those with the greatest propensity to commit? Not necessarily: it depends on the GP’s particular circumstance. But it’s a pretty good starting point – and it’s certainly a lot less subjective than some of those other areas.

So what can we learn from this year’s LP50?

The first is that it emphasises the market-leading position of Canada’s CPPIB, which tops the list by a huge margin, having committed $26.2 billion – $6.7 billion more than any other group (to put this into context: the average total commitment for the LP50 as a whole was $6.3 billion). There’s a widespread perception that it has been focusing more on direct deals in recent years, and sure enough, there’s nearly $9 billion of direct activity there – but our figures show that it also committed nearly $17 billion to funds during the period, much more than anyone else.

And while European group AlpInvest takes second place – proof that its absorption into the Carlyle Group hasn’t dulled its ambition – the list also highlights the importance of US money. The US-based groups on this list committed over $200 billion to private equity during this period, almost two-thirds of the total invested by the entire LP50.

And as a corollary of this: almost half of the capital committed by these 50 investors ($143 billion) comes from pension funds, both in the US and elsewhere. That adds up to a lot of pensioners’ money – which is all the more reason for private equity to do a better job of selling its benefits to the wider world.

Another sign of the times is that certain types of investor are notable by their absence. There are no banks on this list, and only two insurance companies.

So for GPs, the world has changed – and it will no doubt continue to do so as the more sophisticated LPs switch more of their allocation away from primary fund commitments, in favour of lower-cost options that give them more control. As always, the managers who prove to be the most flexible and responsive are likely to be the ones who’ll win out.