It is a cruel irony that just as limited partners are reaching their zenith in negotiating power, many of them are financially hobbled by forces beyond their control. In other words, GPs will do nearly anything to secure LP capital, but the LPs – far from being coy – actually are not hording the kind of treasure that GPs wish they were.
That said, many LPs do have capital to commit, although only a highly select number of GPs will benefit from these allocations. It should surprise no one that experienced LPs in today's market have very well hewn views on where to invest, and these tend to not veer toward the “let's write a billion-dollar cheque to one GP” strategy.
This issue of PEI takes the mood of LPs around the world to learn what lies in store for those trying to raise funds (see page 51). We discovered that the skills of turnaround and distressed specialists are in high demand, as are secondaries investors. As for GPs who have more mainstream private equity experience, the non-mega groups are back in favour.
According to a recent LP survey from Coller Capital, the severe contraction in markets around the world has done nothing to block the globalisation of private equity or damp the appetite that LPs have for putting capital to work in dynamic economies like China, India and Brazil. In fact the vast majority of LPs plan to have at least a six percent private equity allocation to the Asia Pacific region within three years, up from today's four percent. That means that although the allocation pie has shrunk, the piece of the pie going to certain strategies will increase, spelling growth in at least some corners of the private equity world.
In the meantime, many GPs and LPs are having conversations that neither side ever dreamed possible. Does this large, well regarded endowment really want a reduction in its commitment? Is this long-time limited partner really selling its interest on the secondaries market? Are the dead-deal fees really this high? Can valuations really have fallen this far?
Not every participant in the market today will make it through the current turmoil. The LP programmes that survive will do so based on the skilled advocacy of the programme directors, who will remind overseers of the long-term outperformance of private equity and its vintage-year dynamics. The GPs that survive will do so because they won a highly competitive scramble for capital and justified their right to exist amid the most difficult market in memory. In this regard, it is truly the LPs who collectively have the power to decide which franchises live and which do not.
Enjoy the issue.
David SnowExecutive editor