LP competition heats up for stakes in GP management companies

One in six LPs have invested for a stake in a GP management company via specialist funds, and this is likely to rise to over a third, according to the report. Furthermore, around three-fifths of LPs have recently committed to funds' first closings out of fear that they will fail to secure their desired size of commitment later in the process.

According to the Coller Capital Global Private Equity Barometer, the largest investors – those with $50bn+ in private equity assets under management – believe the biggest restraint on their returns is an inability to commit enough capital to their preferred managers. 

Meanwhile, nine out of 10 LPs report that their own research and outreach programmes have recently resulted in new GP relationships – and over three quarters of investors have sourced new GP relationships via recommendations from peers.

The accelerating competition and considerable fees levied to access the best funds are pushing LPs to evolve their approach to private equity investments, which is changing the dynamic in their relationships with fund managers; Unquote examined this trend in an analysis piece in March.

The trend was highlighted in February with the news that a consortium comprising RPMI Railpen, Alaska Permanent Fund Corporation and the Public Institution for Social Security of Kuwait would launch a $1.5bn GP seeding programme (Capital Constellation). The initiative will provide startup capital to 10 private equity firms over the next five years in exchange for a revenue-sharing agreement with the GP, and represents one of a variety of innovative ways for LPs to structure their private equity allocations.

But securing and motivating high-quality talent remains a key concern for LPs just as for GPs: well over half of LPs say that not being able to recruit enough high-quality talent is a significant restraint on their ability to boost returns from the asset class.

Coller's report indicates that half of LP institutions offer their staff performance-related pay – and those institutions are three times more likely to be delivering overall private equity returns of 16%+ than other LPs.

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