GPs bowing to tougher LP demands

The tough fundraising environment in Europe is forcing a greater alignment of interest between GPs and LPs, according to new research.

A study by Initiative Europe has found LPs keener than ever to ensure their interests are closely aligned with GPs.

The survey found even the most established investment houses are realigning basic terms and conditions of their funds due to changing investor sentiment. The main changes have been lower management fees and moves away from deal-by-deal carry, but there has also been some pressure on transaction and abort costs.

In addition, there is greater pressure in areas such as information disclosure, termination rights, rights of exit and softer indemnities. In some ways, this has had a positive effect. For example the survey found that the push for greater transparency means institutions are asking for and VCs agreeing more information rights and a larger and more involved advisory committee.

The caution that has led to greater alignment also means investors are now conducting greatly extended due diligence when contemplating third party fund commitments. As a result, the fundraising process is now taking up to three times longer than was previously the case.

The asset class has also become more focused on the individual, with increased levels of investigation by institutions to ensure that an individual’s track record accurately matches the deals in which he or she was actively involved.

To increase the dialogue between the GP and LP communities, VCs have been working on developing their investor relations strategies. In many cases this has led to the recruitment of dedicated investor relations staff and the strengthening of back office capabilities.

“Fundraising is now recognised as a core competence in a way that was not apparent even recently,” said Guy Waller of Initiative Europe. “Rather than being an unwelcome break in deal-making to be carried out every three or four years, fundraising and investor relations have grown in stature and significance and are now very much an integral part of a successful private equity firm’s daily business.”

The European Fundraising Intelligence Report was based on interviews with over 50 ‘key players’ across Europe including investment houses, advisers, intermediaries and institutions.