Billionaires can be very intimidating.
That’s according to one public pension official, who was explaining why it’s so important for limited partner advisory committees to meet sometimes without the GP in attendance.
“A lot of LPs are intimidated by [GPs]. If they’re called by a GP and the GP says, ‘I’m coming back to market’, a lot of LPs aren’t willing to stand up and be adversarial,” the official says. “You can’t change human nature. That’s the nature of the public pension sector. They want to be their friend.”
Trade organisation the Institutional Limited Partners Association recommended in its 2009 private equity guidelines that GPs make provisions for limited partner advisory committees to meet without them. But the idea has been gaining in popularity lately. “This gives us a forum where there isn’t a feeling of intimidation. You’re more relaxed and you’re willing to say things you probably weren’t in front of a GP”.
The problem, according to several LPs, is that investors are often unwilling to speak their mind in front of GPs, especially if they are having some kind of problem – which undermines the effectiveness of the typical LPAC meeting. Hence the need for private sessions.
One investor compared the situation to a group of corporate non-executive directors who are cowed by an overbearing CEO. “It’s analogous to a board meeting in a corporation, when you remove the management team and get the board members to talk amongst themselves,” said one public pension LP.
Equally, normal LPAC meetings or calls may not be the best place for LPs to bring up contentious issues, sources say. Sometimes it’s better to share thoughts in an informal LP-only session, where they can hash out possible resolutions before (if necessary) raising their concerns with the GP.
“I’ve been on advisory calls where people have been nasty. And not even about the GP doing badly – it was about the GP’s own commitment to the fund. That’s a conversation you should have with the GP directly, not on a big call,” the public pension official says.
LPACs may be limited in other ways too. LPs from smaller institutions have complained that at times their concerns are not heard, since the GPs only pay attention to the most influential investors – who are usually the ones serving on the advisory councils.
When controversial issues arise, sometimes an LP’s best tool is the list of names and phone numbers of other investors in the funds, one market source says. At times, when a GP wants to do something that may not be completely well received, he will go first to the LPAC to get approval and then send communications to all LPs indicating the LPAC is supporting the move. It’s only natural that the GP would listen to the big investors on the LPAC as they don’t want to jeopardise their most important relationships.
The request for in camera sessions is part of the general trend in the private equity industry toward greater power for LPs. ILPA’s guidelines outlined best practices intended to better align GPs’ interests with their investors, and that included enhanced communications between LPs and GPs. LPs have focused on this as a major issue: investors are looking for more and better quality information, and have been learning that it is to their advantage to work with each other, or at least keep lines of dialogue open in case an issue arises. “There’s definitely a lot more happening off camera, sending emails back and forth to get things resolved,” according to one LP from a large institution.
But what does the GP make of all this? GPs tend to grant requests for ad hoc LP sessions because the alternative is that “we’ll hold an LP meeting and we’ll discuss [the issue] amongst ourselves”, the LP says. They can also expect to get a report about what was talked about during the private sessions.
Unfortunately, however, some may see this kind of cooperation as collusion, sources say. “If we’re negotiating behind the GPs’ back, you have to be careful,” the LP says. “Some [GPs] get really sensitive about that. If we’re negotiating partnership stuff, that could be seen as collusion.”
But many investors seem unruffled by this prospect. As the public pension official says. “In all reality, are they really going to come after us for collusion?”