The slow cull

LPs have been vocal in recent years about their need to reduce general partner relationships in a “flight to quality”. Yet a study released in January by private equity advisory group Fimeris found that a majority invested with additional managers in 2011.

The study took data from 113 investors in more than 15 countries, with 41 percent of respondents coming from North America, 42 percent from Europe and the remainder from other geographies.

Approximately 56 percent of respondents to said they had increased GP relationships during the last 12 months, while 13 percent said they reduced their number of managers. 31 percent experienced no change.

One possible explanation for this surprising result could simply be the lag in time between when LPs decide to end relationships and when they actually end them.

“This is a long term asset class, so it takes five to seven years to cull relationships out,” says Aaron Rudberg, director of investor relations at Baird Capital Partners. “Two years from now, people will probably be investing more in new relationships, but they’ll be culling a lot more of their existing relationships. I wouldn’t be surprised if 40 to 50 percent of existing relationships in some of these portfolios are gone.”

At the beginning of 2011, investors in the survey said they expected approximately 33 percent of their commitments during the year to be with new GPs, and 67 percent with existing managers.

“I think part of it is [that] LPs like to build new relationships,” Rudberg says. “Even when I was on the LP side I found that investing in new funds is more exciting than re-upping with an existing manager. So I think part of it is human nature.”
This should come as good news for GPs coming to market with new funds this year – although proven track records and stable teams will still be essential.