Rubenstein: LP-GP pendulum to shift

Limited partners will have louder voices on issues including deal fees and fund sizes, Carlyle co-founder David Rubenstein said at a conference today. He also gave 15 reasons why the financial crisis has been good for private equity.

The relationship between private equity fund managers and their investors will take greater prominence this year, as the power pendulum shifts in favour of limited partners, the Carlyle Group co-founder David Rubenstein has predicted.

“Going forward, the LPs will be heard much more and their concerns on deal fees, size of funds will have to addressed,” he said at a conference in Berlin. “For the next few years, they have the balance of power.”

David Rubenstein

The landscape that has enabled such a pendulum shift is characterised by high demand for limited partners with liquidity. Numerous LPs are plagued by over-weighted private equity programmes and backfiring over-commitment strategies due to slowed realisations; these issues in turn cause them to shrink commitment sizes and scale down their number of GP relationships.

Many firms going to market to raise new funds have subsequently had to cut target sizes or delay fundraising plans. Rubenstein noted that “very few new firms will be able to raise money at all”.

He did deliver some positive news, however, highlighting 15 ways he believes the financial crisis is benefitting the private equity industry:

  1. The need for private equity capital is greater than it has ever been
  2. Reduced prices will yield strong returns
  3. Many deals now do not need new debt or in some cases any debt
  4. There will be a return to normal patterns where there is more time to improve companies
  5. Pressure on banks to lend will mean by late 2009 or 2010 there will be more leverage available
  6. Co-investment opportunities will be greater than before
  7. Debt will be on terms which require more discipline
  8. Pressure to invest money quickly will be reduced
  9. The number of less disciplined buyers will be reduced
  10. Governments will see private equity increasingly as a solution to problems
  11. There will be an enhanced recognition that private equity was not the cause of systematic risk and was not the cause of the economic decline
  12. Expectations of what private equity can do will return to more normal levels
  13. Private equity firms will stabilise and then grow
  14. The image of private equity can improve
  15. Private equity will emerge as the preferred form of alternative investing