LPs change their tune but fundraising will suffer

The reasons may have changed, but the outcome is still the same. Fewer LPs cite fund terms as a reason to shed relationships with GPs, but an overwhelming majority still plan to refuse managers’ re-up requests in the near future.

Less than half (49 percent) of private equity investors cited a fund’s terms and conditions as a factor in paring back GP relationships, according to Coller Capital’s latest Barometer report.

This is in comparison with 79 percent of LPs who cited terms and conditions as a reason to decline GPs’ requests for re-investment in Coller’s 2009-2010 Winter Barometer report. Investor concerns over fund transparency and conflicts of interest were also shown to be eased over the past year.

During 2009 and into 2010 everything under the sun was a consideration for not re-upping

Stephen Ziff

“During 2009 and into 2010 everything under the sun was a consideration for not re-upping, really reflecting the mood at the time,” said Stephen Ziff, a partner at Coller Capital.

Today however, investors are focusing on a few core issues when deciding which managers they will no longer commit to, said Ziff. A large majority of LPs (87 percent) said they intended to turn down GPs requests for reinvestment over the next 12 months.

Overall, the top three factors expected to deter investor re-ups in the next year were poor performance of a GP’s last fund, continuity or succession issues, and GP staff turnover, the report said. LP respondents to Coller's survey expected about one in five GPs to be unable to raise another fund within the next seven years, suggesting significant contraction in the private equity industry was likely.

Accordingly, many firms have begun offering more favourable terms to investors as they launch their latest vehicle amid less favourable fundraising conditions.  Over the course of 2010 a number of institutional investors won concessions on management fees, carried interest, customised structuring and priority co-invest rights, according to a recent report from law firm Simpson Thacher & Bartlett.