LP t&c issues as power balance shifts

Now, signs are emerging that the shift is indeed happening – with immediate impact on terms and conditions. And as previously cited in AVCJ, as per the survey by f-o-f Squadron Capital in the spring of this year, now that Asia Pacific funds are overall following global norms, t&c negotiations in the region, and the tensions underlying them, are also likely to follow these trends.

The continuing shift in power from GPs to LPs is typified by a just-published global survey of terms and conditions for private equity funds by Preqin, based on data from some 1400 investors. Some 81% of this poll reported a discernible shift in the balance of power during fund term negotiations over 2009, with around half of these actually seeing material improvement in their deal-related fee terms. Concurrently, though, satisfaction levels among LPs continued to deteriorate, with only 58% feeling that their interests are properly aligned with GPs. And almost two thirds were dissatisfied with the level and structure of management fees.

Putting these opinions alongside actual fund terms, the same survey found that new buyout funds of the 2010 vintage, or yet to have a first close, charged on average 1.59% management fee, down from 1.91% in the 2008 vintage. So LPs are clearly making their voices heard and actually securing lower management fees, whether as special deals for the likes of CalPERS or as a generalized pressure across the industry.

The question is then whether this dissatisfaction is set to continue despite the shift of power towards LPs and better terms from them. Signs are that it is, and if anything, may increase. The respondents across such a broad poll presumably already realized the shifts they were achieving, but registered their dissatisfaction nonetheless. And performance is probably at the root of this.

LPs are simply not happy with the results they are seeing from private equity. That was the gist of the findings in the recent Coller Capital Global Private Equity Barometer, where the number of LPs reporting lifetime returns on their portfolios of 10% or less had more than doubled since 2008 to over 51%. And though the same poll found that the majority of respondents felt GPS were responding favorably to the ILPA Guidelines, this obviously was not enough to offset the plain absence of hard money returns.

The balance of power between GPs and LPs has always been primarily a consequence of the perceived value and scarcity of private equity – or at least, of the kind of top returns seen from top-decile funds. GPs had the leverage [sic.] to exact favorable terms from an institutional investor base eager to see the 16% annualized returns they said they could deliver. Now, LPs are evidently making it clear that, if they want to continue receiving commitments, they will have to moderate their t&c expectations.

In Asia, as also reported previously in AVCJ, there are very substantial expectations building up for investment in the region. Those expectations could work to Asia Pacific GPs’ advantage in the short term, giving GPs more clout in setting terms and conditions. But there are already too many signs that those expectations may be overplayed. Regional GPs with the long-term health of the Asian industry – and their own firms – at heart, may be wise not to take too much advantage of the slight weighting of the balance in their favor.

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• Topics
• Regulation
• Funds
• LPs
• Performance
• Fundraising
• Coller Capital
• Squadron Capital Advisors