‘Intimidated’ LPs demand private sessions

LPs more than ever are asking GPs to officially sanction 'private meetings' without managers where investors feel more comfortable speaking openly.

Limited partners have been demanding that general partners set aside time for advisory committees to meet in private, typically after advisory council meetings.

Investors have begun to routinely request GPs write provisions into limited partner agreements specifically setting aside time for these in camera sessions.

“We do this request almost religiously,” said one public pension official. “Typically when issues are raised around partnership issues, we’d like to have a discussion amongst ourselves as opposed to the old mentality of, the GP sends out something to you and says, ‘We’d like you to vote on something’, without the benefit of discussion.”

LPs have rarely banded together in this way, making it easier for a GP to argue against changes to fund terms and other provisions. But by discussing issues together and presenting a united front when necessary, LPs are likely to be more successful in winning concessions from a manager.

The private sessions tend to have “more meaningful discussions. You end up with a spectrum of points of view,” the public pension official said.

Trade body the Institutional Limited Partners Association (IPLA) has recommended such agreements since the publication of its private equity guidelines in 2009. The trend has been growing since the guidelines were released, with an increasing number of LPs calling for private meetings, sources told Private Equity International.

Working together

A couple of different factors are driving the growing popularity of in camera sessions.

First, LPs tend to work closely together when a fund is failing. In this case, it is important to come up with recommendations outside the hearing of the GP.

Second, LPs have been getting more amendment requests for things like fund term extensions and investment period extensions, and the private meetings are a good place to work out how to address those requests.

Failing funds present a growing problem to LPs. In today’s environment, investors are scrutinising their managers with more rigor than in the past, and making tough decisions about cutting down the sizes of their portfolios.

Inevitably, some managers will not survive. A recent Coller Capital survey revealed 38 percent of investors polled believed 10 to 20 percent of GPs would fail to raise a new fund within the next seven years.

When dealing with firms that have had significant performance issues, LPs at times have to find their own ways to salvage their investments. This may entail pushing the GP to reduce management fees or alternatively, refusing requests by the manager to extend a fund’s investment period. These issues are easier to work out when the GP is not present.

In the absence of in camera session provisions in the LP contracts, one LP has to step up and lead the effort to organise LPs, which is tough for busy and under-resourced institutions.

Intimidation factor

One LP interviewed by Private Equity International said private sessions helped make a change in one fund they were committed to. The LPs in the fund held several private sessions to talk about a request to extend the investment period on an under-performing fund. In the private sessions, LPs were able to get diverse points of view on the issue and eventually present the manager with their thoughts. Eventually the investment period was extended and in exchange the management fee was reduced.

LPs tend to speak their minds when the GP is not in the room, said one official at a large US institution. “We’re dealing with billionaires. A lot of LPs are intimidated by [GPs] … This gives us a forum where there isn’t a feeling of intimidation,” the US public institution official said. “You’re more relaxed and you’re willing to say things you probably weren’t in front of a GP.”