Video: Natural attrition of GP relationships to accelerate – Capital Dynamics' Katharina Lichtner

With unprecedented numbers of GPs either on the road or finalising PPMs, LPs are faced with record numbers of funding requests. These come, inconveniently, at a time when distributions are ebbing. As a result, LPs are increasingly selective when assessing investment opportunities – and their tactics are changing. While past performance once acted as the most crucial determinant of future performance, it is no longer deemed as significant a gauge.

"We need to de-emphasise the value of track records, particularly post-crisis," stresses Katharina Lichtner, managing director at Capital Dynamics. She says it's no longer enough to look at what the GP did, but how they did it. "We are looking at value creation stories and it's important to understand precisely how the value was generated, and match that back to the capabilities of the GP. It's a more important indicator of future performance."

The unrealised portfolios are also very important. "We can see that GPs were disciplined enough to do good deals without over-leveraging." Trawling current investee companies is also important in determining how distracted GPs may be by underperforming businesses. "Large numbers of workout cases will absorb lots of attention of GPs. We want to back GPs with the time and bandwidth to focus on new investments."

Even if a GP ticks all these boxes, the house must also be popular. "You can have a good reputation with other LPs, but a lousy reputation with banks and sellers of businesses. This is important," Lichtner states, indicating the impact this will have on the ability to do deals in future.

Existing LPs are therefore no longer a sure thing. "We no longer believe a routine re-up is the best way forward. It's now about fresh diligence on each fund." Indeed, Capital Dynamics has historically experienced roughly a 10% turnover in its core managers. "This is simply down to natural attrition. We'll probably see an acceleration of that natural attrition owing to the current market, however, we don't envisage a landslide of our GP base. It will be less a shift in numbers though and a bigger shift in where those numbers reside."

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