LPs are more than just a source of capital

Fund managers should think of their LPs are partners and not solely as a source of capital, according to several delegates at PEI’s CFOs and COOs Forum.

When it comes to fundraising, general partners need to remember that limited partners are exactly what the name says: partners.

That’s what delegates at Private Equity International’s 13th CFOs and COOs Forum at the Plaza Hotel in New York emphasised to their fellow attendees this week.

GP-LP relations are truly a form of a partnership, in which LPs shouldn’t be viewed simply as sources of capital. The concepts of loyalty, transparency, and being honest and forthcoming with information provided to LPs are of the utmost importance. In turn, LPs will respect fund managers and appreciate the information available, according to one delegate at the event.

This is not only true with existing LPs but also with potential new investors, who should know whether a fund is close to being oversubscribed and what to expect in terms of how much room is left in a fund.

The need for transparency and honesty in the GP/LP relationship comes at a time when LPs are requesting a lot more information and transparency upfront from GPs and demanding more customisation and depth of data.

LPs are also placing a greater emphasis on the due diligence process. A few attendees noted that LPs are talking to each other for purposes of due diligence and benchmarking, especially the larger investors. There are more venues and opportunities for them to communicate and LPs are raising their hands more frequently at meetings, delegates said.

According to a poll conducted during one panel, the biggest concern of respondents’ LPs during their latest fundraise was management fee level and offset, at 39 percent. The second largest worry was co-investment rights, at 21 percent. GP commitment to the fund came last at 11 percent.

Surprisingly, only 13 percent of respondents said they offered a reduced management fee in their latest fundraise for early investors. The majority, or 59 percent, said they did not offer early investors any preferred terms.

Given the hot fundraising market right now, some fund managers may inadvertently gain overconfidence, which is not helpful to the private equity industry or the manager itself, according to one delegate. The attendee said the key is to remain true to the core culture and values of the firm at its founding. “Remember your roots,” the person said.