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Acanthus survey puts LP-GP relationship under the microscope

Acanthus Advisers’ seventh annual survey of LP-GP relations examines the foundation of the LP-GP relationship, asking the question: “Is the LP-GP model working?”

And according to the private equity placement agent’s findings, on initial inspection, it would appear so. The majority of both LPs and GPs describe their relationship as neither weak nor strong and more respondents in both groups describe the relationship as excellent and solid versus weak. 

There is evidence of stability in the face of significant volatility more broadly, with 60 per cent of both LPs and GPs believing the market dislocation of recent years has in fact had no impact on their relationship. In fact, a third of LPs believe the relationship has improved as a result of the crisis.

However, on deeper inspection, terms such as fees, investor protection clauses and GP commitments tend to generate diametrically divergent views. The majority of LPs believe that current fee structures cause an imbalance between LPs and GPs (85 per cent), investor protection clauses are weak (c.50 per cent), LPs should be more involved in key GP personnel issues (c.60 per cent) and GPs should invest more in their own funds (c.80 per cent). The majority of GPs hold the reverse view on all counts.

Further emphasising the gulf in expectations, LPs continue to rate GPs’ communications as average to poor, while the majority of GPs believe their communications are good. For example, over 80 per cent of GPs believe that strategic changes are well-communicated to LPs, while less than 15 per cent of LPs agree. In fact, around a third of LPs classify GP communications on this area as poor. The same divergence applies to communications regarding team changes and underperforming investments.

Looking ahead, how can consensus be reached on the continuing areas of conflict? There is evidence that, while LPs perceive change more positively, GPs are less keen. For example, GPs tend to be more positive on the status quo of the LP-GP relationship (40 per cent describe the current relationship as excellent vs. less than 20 per cent of LPs), but LPs tend to be more positive on the improvements in the relationship – 30 per cent of LPs think the relationship has improved over the last year versus only 15 per cent of GPs. Furthermore, over 20 per cent of GPs think that the relationship has in fact deteriorated as a result of the market dislocation, compared to only five per cent of LPs. A potential inference from this is that GPs are relatively more satisfied with the status quo, or “the way things were”, and are therefore more resistant to change – while LPs hold the reverse position.

The survey also found that GPs are more positive on the status quo of the relationship – 40 per cent of GPs classify the current relationship as excellent and solid vs. less than 20 per cent of LPs that agree.

LPs are more positive on the changes in the relationship – 30 per cent of LPs think the relationship has improved (up from less than 20 per cent last year) vs. only 15 per cent of GPs that agree (down from a quarter last year). Over 20 per cent of GPs think the relationship has in fact deteriorated as a result of the market dislocation of recent years compared to only five per cent of LPs.

A further 85 per cent of LPs believe that fee structures remain a problem to some degree while over 80 per cent of GPs disagree, in line with last year’s findings.

Investor protection clauses do not seem to satisfy the investors they are designed to protect. Around 50 per cent of LPs view these clauses as weak compared to only two per cent of GPs. A quarter of GPs rate these clauses as strong but only a very small minority of LPs (three per cent) agree.

Over 80 per cent of LPs agree or tend to agree that GPs should invest more in their own funds. GPs are split down the middle, with 50 per cent agreeing or tending to agree and 50 per cent taking the reverse view.

Three-quarters of GPs disagree to some extent that LPs should involve themselves in key GP personnel issues, in line with last year’s findings.

Eighty two per cent of GPs think changes in investment strategy are well-communicated but only a minority of LPs (14 per cent) agree.

Three-quarters of GPs classify communications regarding underperforming investments as good, compared to only a tenth of LPs that agree. A quarter of LPs classify such communications as poor.

Despite continued disagreement on the effectiveness of the exchange, the vast majority of both LPs (92 per cent) and GPs (94 per cent) agree that the quality of communication is an important factor in an LP’s decision to invest in a GP’s fund.

“The findings of this research demonstrate that the LP-GP relationship remains relatively stable in the face of significant volatility but that lack of change is not necessarily good. The desire to see further change is clearly expressed by LPs and general partners will have to do more to meet the demands of their investors,” says Armando D’Amico (pictured), managing partner of Acanthus Advisers. “As a huge number of funds come to market over the next few years, areas such as terms and the quality of the dialogue will in many cases be decisive factors.”

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