Q&A - Bob Long, President, CEO, Conversus Asset Management

Given the downturn in the markets, would you, as an LP, do anything differently now? What advice would you give to a first time investor?

The recent market dislocation brought to the forefront the importance of liquidity within an investment programme. While Conversus has been consistently comfortable with our liquidity position, a number of investment programmes experienced significant liquidity constraints. The typical over-commitment strategies will need to be reassessed to ensure obligations can be met.

For a first time investor looking for immediate exposure to private equity, an investment in a publicly traded fund-of-funds is an ideal option. It can provide immediate access to a diversified set of private equity funds well positioned on the j-curve. At current trading prices, investors can access our portfolio at a substantial discount to net asset value.

For those looking to invest directly, we would recommend funds run by well-established general partners that have proven their ability to make money across various phases of the economic cycle by making operational improvements to their portfolio companies and growing cash flow. We are great believers in the persistency of performance by private equity GPs and these are the types of funds that typify our portfolio.

What would you say is the biggest change in terms of how a GP treats its LPs now?

The relationship between GP and LP continues to evolve, and the balance of negotiating power swings with the market. Clearly, GPs have responded to investor demand for greater transparency in the portfolios being built and managed. This they have done through investing in IR resources, greater use of technology to communicate messages and expanding the information about underlying portfolio performance.

Often, the strength of the fundraising market brings changes to the economic balance in the partnership terms. Today, the balance has shifted to LPs who are more frequently seeking better terms from GPs and often succeeding. We have witnessed a closer alignment of interest in transaction fees, (which seem to be migrating toward, at minimum, an 80/20 split), disappearance of premium carry arrangements, stronger clawback provisions, more pervasive LP rights to change partnership management, agreement that time diversification when investing is a valuable portfolio tool, and an even greater level of disclosure.

The recently released ILPA Private Equity Principals will be a foundation for many of these forthcoming negotiations.

What is more relevant when assessing the merit of a GP, their track record or the current underlying portfolio?

Understanding how the GP has invested through economic cycles is an important element of assessing quality. We are looking for consistency of strategy, cohesion of the partnership and its decision making ability, and observing the value-add brought to their investments over time. So, while performance of the current portfolio can be insightful, gaining confidence that success can be consistently repeated is a priority.

What is the best indication of the true skill of a GP - cash in versus out in the last five years, or current performance (realised and unrealised)?

Five years in the context of private equity is a relatively short period of time. However, I do believe that the GP needs to strike the right balance between cash returns and IRR. A strong cash return generated over 15 years may not be competitive with other asset classes into which LPs have the option to invest. Particularly in the current market, however, understanding the value a GP has brought to its investments in the current portfolio to both weather the storm as well as position for future success, will dictate if these GPs will themselves succeed when returning to market for that next fund.

Do you see the typical 10+2 year fund structure changing at all in the future?

Private equity is a long-term asset class, one that takes time to source, close, improve and finally exit investment opportunities. As a consequence, I anticipate that the traditional 10 + 2 year fund structure will survive. Where you might see a change is in the investment period. In recent years the investment period in many fund documents has been lengthened to 5-6 years. I could see the investment period reverting back to the more historical standard of 4-5 years.

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• GPs
• UK / Ireland