LP of the future: moving towards shadow capital

Customisable fund models, particularly separately managed accounts, are becoming more popular.

A trend away from high fees has already started to take its toll on some parts of the market. Funds of funds have declined in popularity in recent years, with capital raised for this strategy dropping to a 10-year low of $11.4 billion in 2017, according to PEI data.

The desire for LPs to cut costs and thus boost returns has sparked a shift towards more customisable fund models, or ‘shadow capital’. A particular favourite of the LP market is separately managed accounts, with Paris-headquartered Ardian among those reporting increased appetite from its investors.

“If you look at the phrases ‘limited partner’ and ‘general partner’, those will become not fit for purpose in the future,” says Eamon Devlin, managing partner at fund lawyer MJ Hudson. “It presupposes that your relationship is in a fund, and there’ll be a lot more shadow capital in the next 10 years, which is not a GP/LP structure.”

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This movement will be further bolstered by increasing consolidation of LPs, Devlin adds. In the UK, 89 local government pension schemes have already been grouped into eight pools of assets to improve transparency, boost returns and bring down administration costs. With greater assets comes the need to put more money to work, meaning some funds will not be able to provide the commitment sizes required by superfunds. “Pension funds are consolidating, family offices are consolidating, those are all trends leading into bigger pools of money, which will in turn lead to investors having separate account mandates with GPs,” says Devlin.