Communication breakdown

When times are tough, relationships become ever more important. So the latest edition of placement agent Acanthus’s annual survey of GP/LP communications does not make for cheery reading.

About the only positive point was that relationships don’t seem to have actually deteriorated since last year, on the whole. But a situation in which only 85 percent of LPs felt their GP relationships were either “weak” or “neither weak nor strong” – and fewer than one in five felt relations had improved in the last year – can’t be all that healthy.

Some of this comes down to differences in opinion over fund terms – notably fees and GP commitments. Ninety-seven percent of LPs said that current fee structures were a source of discord with GPs, while three-quarters felt managers should be investing more of their money in their funds.

But it also seems to be the case that GPs are just not as good at talking to investors as they think they are. Although most LPs agreed that investor relations efforts had improved in the last year, only 9 percent of LPs described GPs’ communications about strategy as “good” – compared to 78 percent of GPs. Eighty-one percent felt their level of reporting to LPs was good – but only 15 percent of LPs felt the same.

Of course, it’s hardly unusual for survey respondents to over-rate their own capabilities. It’s notable that the same disconnect was apparent when it came to assessing the quality of LPs feedback to GPs: 30 percent of LPs described themselves as “good”, whereas only 15 percent of GPs agreed.

Nonetheless, it does look like there’s a communication issue (or perhaps an expectation gap) here: neither side seems to be getting the information it wants from the other, or at least not consistently.

This would be bad enough at the best of times. But it’s particularly alarming now, when so many firms are either fundraising or about to come to market and macro conditions are challenging for many portfolios. Almost all respondents agreed that the quality of communication was critical to LP’s investment decisions – so theoretically, those that fall short are the least likely to survive the much-vaunted shakeout. Although you could argue that if most GPs are as bad as each other, it won’t be much of a disadvantage …