Relations between limited partners and general partners are in a state of flux amid ongoing economic volatility, according to a new report from Barnes & Thornburg, which draws on insights from a survey of 125 LPs, GPs, and service providers across the private funds landscape.
The 2023 Investment Funds Outlook Report which covers the evolving relationship between LPs and GPs as the latter compete for investor capital, examines the private funds outlook for several key sectors, including cryptocurrencies, life sciences, and real estate private equity (PE), and finds that GP will need to find innovative ways to attract LP dollars and address key concerns over ESG and succession planning.
According to the report LPs now have more leverage than before – and fund terms are changing as a result. Investors experiencing the “denominator effect” are increasingly particular about where they direct their money, as slow exits, declining valuations, and liquidity restrictions have impacted LP cash flow. It’s no surprise, then, that 75% of respondents expect changes in fund terms that will benefit LPs, such as investment period extensions, changes in GP commitments, no-fault divorce clauses, and more.
Succession planning is also highly valued by LPs, yet only 41% of GPs have such plans in place. This issue will only take on more importance amid persistent economic uncertainty and continued pressure from LPs to ensure key portfolio managers and other team members safeguard long-term continuity in investment decisions and protect LP capital.
The report also reveals that cryptocurrency is a risk many are still willing to take despite a number of high-profile blow-ups. Most respondents – particularly private equity and credit managers – say the current state of the cryptocurrency market has significantly impacted their company in a negative way. Yet, even as regulatory scrutiny picks up, the majority are still considering or actively deploying capital in the space in 2023.
Life sciences meanwhile, is also identified as an area with plenty more investment potential. Though investment in life sciences has cooled slightly, more than half of respondents focused on the space see gene therapy, precision medicine, artificial intelligence/machine learning, and cell therapy as key opportunities.
Real estate PE funds are also draw investor interest despite the softening economy. Though such funds may experience difficulties when compared to pre-2022 levels – due, in part, to the shift to work-from-home and real estates rates – opportunities abound. For instance, roughly the same number of respondents call rising interest rates an opportunity as those who view it as a challenge.
“It’s a truism that when you have changing markets, you have more interesting investments,” said Jahan Sharifi, co-chair of Barnes & Thornburg’s Private Funds and Asset Management Group. “As our current economic uncertainty persists, the more sophisticated, thoughtful, and analytical funds have an opportunity to get out in front. Our hope is that the insights gathered in this report can help them do just that.”
