Small wins give hope of pendulum swing to LPs

While the balance of power has yet to shift meaningfully towards LPs, those who had terms rejected in LPA negotiations may want to try again.

This month we’ve been looking at how the frenetic fundraising environment has been playing out on the human resources and talent front, and how it may impact returns, where GPs source their capital, what 2023 could look like and whether we’ll see more zombie funds.

One question left unanswered is whether the fundraising dynamics could lead to LPs pushing for better terms in LPAs and side letter agreements.

Conversations with LPs and legal advisers suggest it is too early to tell if a major reset is on the cards. While public equities have tanked, private equity managers will take as long as they can to write down the value of their assets in hope of a rapid market recovery.

“GPs are saying ‘look at the covid rebound [as justification for keeping valuations unchanged],’ says one London-based fund of funds manager. “They never mark down before fundraising.”

There is, however, movement at the margin. Tim Clark, partner and co-leader of the global private funds practice at law firm Mayer Brown, says that some private equity sponsors are more willing than before to negotiate over what gets charged to the fund. LPs have also had some success changing the language around co-investing.

“The standard co-investment language was ‘you’ve expressed an interest, we understand you’ve expressed an interest, we may give you a call or we may not,'” Clark says. “Now, certain types of deals will get pro-rata allocations and [the language] is somewhat more specific about what LPs can participate in.” These developments are taking place among the very largest LPs with the most bargaining power, he adds.


Courtney Nowell, partner and co-leader of Morgan Lewis’s global private funds practice, has yet to see more give from GPs on terms. She has seen an increase in the number of GPs offering a discount for LPs that participate in first close and greater flexibility generally.

“A year ago [the GP] would say ‘closing is tomorrow, 10am Greenwich Mean Time – be there or we’ll replace you with someone else,'” she says. “Now we are getting, ‘Ok, I know we were scheduled to close Tuesday, but if you need an extra day to clean up final items, we’ll close Thursday.”

There also appears to have been an increase in the number of managers holding an A and B first close, a week or two apart. This allows LPs to receive a first-close discount even if they don’t have the capital available at the first time of asking.

Whether these incremental shifts lead to bigger developments largely depends on whether PE fundraising is experiencing a temporary slowdown or something more long term. If a window of opportunity does open, LPs should be prepared.

“My advice [to LPs] would be to go back and look at what you asked for in previous funds… stuff you asked for that got rejected, maybe it’s time to have another go,” says Clark.