LP mythbusters miff GPs?

The China Investment Corporation's two-step move to join GIC Special Investments and the Future Fund as an Asia Pacific stakeholder in Apax Partners represents a new form of innovatively structured secondary transaction by a new LP on the block – one of an SWF class that in itself did not rate separate billing until a few years ago. Now there could be no clearer demo that new Asian LPs are moving into the market as never before, and in new ways.

As outlined elsewhere, CIC is getting a piece of the Apax management company's action and a well-tailored cut of future deals by assuming uncalled positions, rather than a blanket exposure to legacy portfolio issues in Apax's fund. And unlike their earlier investment in the Blackstone Group, CIC is not helping their investee's leading GPs to exit, but is planning to work alongside them, presumably gaining insights every step of the way up the learning curve. Apax's consummation soon after the CIC announcement of its £975 million ($1.6 billion) secondary buyout of pharmaceutical services company Marken from Intermediate Capital Group suggests that CIC was working on the best information. AVCJ sources, seconding reports that CIC diligence into Apax was unusually intrusive, emphasized that CIC must have seen, and liked, Apax's upcoming deal pipeline.

A smart move into a resurgent asset class, then? Unfortunately, not every data point on the current GP/LP interface is so positive. For one thing, CIC took up its new stake in the uncalled commitments to Apax Europe VII from existing LPs, who presumably were either unable to fund those commitments, or were unwilling to continue to put more money into at least that end of the asset class. Neither possibility is encouraging. Furthermore, as the latest Coller Capital Global Private Equity Barometer found, international institutions seem to have lost faith in private equity and its ostensibly unique differentiators as an asset class as never before.

LP experience during the crisis did anything but confirm that private equity is a counter-cyclical asset class that offers outperformance over and above the public markets. Much of what unfolded during the downturn could be blamed on LPs' own structures and investment practices. Private equity firms can't be blamed for overcommitment strategies, nor for mechanical application of the denominator effect. And they can't really be blamed for the headlong trend-following by starstruck LPs that led them to plough hundreds of billions into the asset class in the first place during 2005-07 – and who were ultimate buyers of the securitization instruments and other financial derivatives that fueled the leverage bubble. As one LP, Derek Murphy, First VP for Private Equity at the Public Sector Pension Investment Board of Canada, said at a major Asian pensions event recently, "we're the ones who put the lipstick on this pig and let it in the house, and now it's walking around."

Nonetheless, private equity is now facing a growing credibility gap amongst LPs. Worryingly, that gap also opens up within institutional investors, where private equity and alternatives heads have to fight to persuade their own boards to re-up or sustain commitments to the asset class – not always with the best ammunition from their GPs. At least for now, signs are that the LPs are not scaling back their commitments. But GPs are going to have to meet their investors halfway or more to maintain anything like the support and buy-in they have seen in the past.

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• Topics
• Greater China
• LPs
• The Blackstone Group
• Coller Capital
• Apax Partners Hong Kong