LPs embrace wider role in private equity – AVCJ Forum

"You used to have just one model: GP-LP. Today it's a partnership," said Ivan Vercoutere, managing partner and CIO at LGT Capital Partners. "Some investors are very happy to be passive, and probably can only be passive given the size of capital that they deploy. Others are extremely active, on the order of being like a general partner. So there's more than one way to be very successful in this marketplace."

The growth of the region's private equity industry in recent years has been a key driver of this expansion, with established managers raising increasingly larger funds and providing options for investors.

"Capital's definitely not scarce, and capital pools are only growing, so competition for the seat at the table with the GPs is also growing," said Raju Ruparella, director of private equity for Asia at Ontario Teachers' Pension Plan. "So you're seeing the GP funds continue to rise in size, and so in order to be creative and in order to find other avenues for investment you need to find other pockets where you could create partnerships."

Ironically, while the number of managers in Asia has grown in recent years, LPs have found themselves slimming down their GP commitments to more manageable sizes. Steve Byrom, head of private equity for Australia's Future Fund, said many of his fellow LPs are trying to cap their GP relationships at 50, leading to increased competition among managers for the LP capital as well.

For GPs that do manage to gain commitments from one of these choosier LPs, they may find pressure of a different sort, as the investor seeks to increase its commitment to make up for the loss of diversification. Managers may need to be flexible about accommodating this demand by offering co-investment or direct investment opportunities to their investors, or allowing them a greater say in the GP's strategy.

"It's certainly driving returns down, and it's driving behaviors," said Byrom. "I've witnessed LPs say, ‘Unfortunately I can only get $100 million into your fund. If you're going to be one of my 50 core relationships I need $200 million with you. What else can you do with me that gets me $200 million with you?'"

The traditional LP relationship has by no means disappeared, however, and plenty of investors are satisfied leaving investment decisions to their GPs. This is particularly true for newcomers like Japan Post Bank, which just started its alternatives investment strategy last year. However, even in this case the LP need not be completely hands-off: it can still leverage its particular advantages to the benefit of its GPs.

"Japan's private equity space is not growing as much, and there are not so many GPs here in Japan," said Tokihiko Shimizu, senior managing director and head of private markets investment at Japan Post Bank. "And we have unique position, because we have 24,000 branches all over Japan, and they are fully localized, which makes this network a very strong source for deal flows. But we have to stay LP status, and that means supporting the GPs from the viewpoint of deal sourcing."

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