Limited partners are analysing the unrealised portfolios of prospective GPs much more thoroughly before deciding where to commit capital, a panel of industry veterans said Friday.
“It used to be there was very little drilling down into the portfolio company [and] looking at the capitalisation,” said managing director at Jefferies & Company’s fund placement group, Mark Hallock. “Now, when someone is looking at an unrealised portfolio company, they want to know the terms of the debt, the covenants, are they in compliance, have there been any periods where they were in default…That just didn’t happen before 2001 and I would argue even in the 2005-2007 ‘second golden era’ of fundraising.”
LPs are conducting more ‘robust analysis’ of portfolios with their existing GP relationships as well as with new relationships, he added.
There is zero value today to a firm saying 'this is the black box, and just trust us as to what the end result is going to be'. People want to be involved in the process.
In response to heavier due diligence on the part of LPs, transparency from general partners has risen tremendously, said Fortress Investment Group managing director Jonathan Fox.
“There is really no level of detail that we will not go into on portfolio companies and on investments,” he said. “There is zero value today to a firm saying ‘this is the black box, and just trust us as to what the end result is going to be.’ People want to be involved in the process.”
Regarding terms and conditions, while all members of the panel were in favor of the private equity guidelines established by the Institutional Limited Partners Association, there was significant resistance to the concept of a “one size fits all” list of rules.
“There is not one set of terms that should fit all funds,” said von Lehe. “I think you need to look at the facts and circumstances fund by fund, but the spirit behind [the rules] I think is good. The fact that people are focused on these issues and the fact that it’s created a dialogue and discussion on terms I think is very healthy for the industry.”
One development that has improved international relationships recently between LPs and GPs is the increasing global reach of fund of funds, Fox said.
“The fund of funds are playing a very interesting role in introducing some of the Asia-, Middle East-, South American- and European-based LPs to US-based GPs because often the LPs themselves are facing the same problem: they want to find you, and they don’t have the resources and the contacts…so there’s a bit of this match making,” Fox said.
“That’s why this is still very much a relationship based business. There is no Facebook or LinkedIn unfortunately for capital raising,” he said.