Which hat to wear?

General partners ignore their investors at their peril. But aren't dealmakers supposed to spend their time on, well, doing deals as opposed to looking after LP relationships?

Market folklore has it that when George Roberts, founding partner of Kohlberg Kravis Roberts, last went out to raise money for the firm in the late 1990s, two large US state pensions decided to back the firm properly and wrote cheques for a billion dollars each. Both institutions had invested in the firm before, and so committing such enormous amounts of money to its latest fund somehow wasn't such a big deal. Roberts is believed to have taken no more than a couple of meetings to secure these tickets.

Nice work if you can get it, and testimony to excellent relations with the buyside, for the firm as much as for Roberts personally. For despite KKR's towering brand recognition in US buyouts, it is hard to imagine that anyone else inside the firm would have been able to raise so much money so easily -anyone, that is, except Robert's partner Henry Kravis.

When dealing with private equity managers, limited partners want to deal with the key people. Investors want to know exactly who is going to handle their money, and because in the final analysis that is always going to be the general partner(s) themselves, LPs don't like it if GPs are trying to delegate investor relations to more junior colleagues in the firm, let alone outsource it altogether. As a general rule this applies as much to capital raising as it does to other defining events in a fund's life, and it is particularly relevant in the current bear market when LPs want to hear directly from the senior people in a firm about how they're weathering the storm.

For general partners this poses a dilemma. Temperamentally, private equity people tend to be best suited to buying and selling companies as well as dealing with problems in the portfolio when times are bad. Investor relations typically doesn't constitute a core competence. Time is also a factor: larger funds will have at least several dozen investors, so for GPs to keep the lines open at all times to all LPs before, during and after a fundraising campaign can be an arduous and distracting task indeed.

Nevertheless those running private equity firms are in no doubt just how crucial it is for them to be talking to their buyside. The need to improve the LP/GP interface is, in fact, one of the key drivers of the industry's ongoing institutionali-sation. It favours the larger, longer-established firms in the market where the next generation of dealmakers has already been brought in, leaving the founding partners with more time to cultivate the buyside. This though doesn't fully do justice to investors' demands that the people they communicate with also be the people looking after the money, so to what extent LPs will accept this kind of division of labour at a firm largely depends on the calibre of the people involved. But it certainly affords the big players a significant advantage over newcomers where the key individuals are having to wear almost all of the hats, all of the time.

Limited partners want to deal with the key people

The days of elder private equity statesmen raising a billion bucks in the course of an afternoon may be gone. But as the industry continues to make its way towards the asset management mainstream, they are going to have to play a key role in making sure investors feel well looked after in times both good and bad.