LP of the future: the transformations ahead

Sophisticated limited partners will be ratcheting up the home improvements in a bid to generate the best returns.

What will a typical private equity limited partner look like in 10 years’ time? Will closed-ended fund investments still play a prominent role in its portfolio, or will co-investments, direct investments and separately managed accounts take the lion’s share? Will it still be willing to pay management fees to GPs? Will it have finally broken down the transparency and disclosure barriers it has been chipping away at since the global financial crisis? Will ‘limited partner’ even be the correct way to describe it?

Over the past decade we’ve seen a shift in the way investors act. The industry’s most sophisticated investors began it as ‘limited partners’, with the emphasis on ‘limited’, accessing the asset class almost exclusively through commitments to primary vehicles or funds of funds and whose relationship with GPs is restricted to writing a cheque. Now the emphasis is on ‘partners’ as they team up with fund managers on more of a level footing. They position themselves as strategically valuable, bringing sector expertise, industry contacts and even, on occasion, a viable exit route. It’s not a stretch to imagine that in the next decade the ‘limited’ might disappear altogether.

The rapidly evolving needs of investors are evident in the increasingly creative solutions being put forward by fund managers: innovative management fee and carry structures, long-dated funds and funds of firms, to name a few.

LP of the future in 10 slides

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At the heart of these changes is the need to generate consistently strong returns in an increasingly challenging investment environment. From surface improvements to full-scale renovations, over the next few pages we walk through the transformations limited partners have in store. GPs, take note.