Pain Points
“Don’t waste a good crisis,” the new mantra goes. So let me ask this: Why aren't we using this epic downturn to fundamentally re-frame the relationship between GPs and LPs? Instead, people are battling along the same lines across which LPs and GPs have been skirmishing for years. It's like World War I: fierce battling yields a few acres of pockmarked muddiness. But what if it doesn't actually matter if the fee offset is two-thirds or three-quarters? What if it really doesn't make a difference whether the no-fault is triggered by 66% or 80% in interest? Maybe the the LP-friendly/GP-favorable axis needs to be discarded in favor of some entirely new, orthogonal continuum that re-thinks how interests are aligned? Let me put a finer point on it: Currently, LPs worry that the carry system grants GPs a free option in times of frothy markets; LPs ask: "Why pay an incentive to people who simply capture beta?" GPs on the other hand bellyache about how long-dated carry payouts can be; after all, those wacky hedgies get paid every year (watch those high watermarks, boys).
