LPs & GPs benefit from mutual support

The generalised perception of private equity power relations pre-credit crisis saw GPs as the ones with the upper hand, able to choose at leisure from a large pool of LPs. Following the collapse of Lehman Brothers, however, a fragile and unspoken agreement was established between GPs and LPs, as many GPs, not being able to generate returns, opted against making capital calls providing in turn many LPs with the room to breathe.

At present, the media has been alluding to a change in the ‘balance of power' between LPs and GPs - a marked shift that sees LPs take control.

Further proof of this shift was witnessed in September last year when the Institutional Limited Partners Association (ILPA) issued guidelines that urged better terms for investors including greater disclosure, minutes at advisory committee meetings and reduced transaction fees. Last month, we saw a continuation of sorts. Executives of TPG, KKR, Carlyle Group, Avenue Capital Group (one of the first managers to endorse the ILPA guidelines) and Silver Lake Partners finally met with their investors to discuss giving LPs more rights and lower fees.

Indeed, much of the debate on the balance of power shift has centred around fees and alignment of interests. Still though, some believe that this shift is detracting from the real issue: The debate around fees may be a red herring", notes Alan MacKay, CEO of fund-of funds Hermes GPE. He continues: "The standardised fund structure works for the large majority of LPs. The discussion on fees is a fair one but it is mostly pertinent to the 10-20 private equity firms with mega funds; and in this case, it is likely there will be an alignment."

He continues: "There are other important areas where we see a shift in influence. For instance, LPs are tightening parameters in the GPs mandate, narrowing down the exception criteria to make sure the GP remains focused on its investment criteria. Similarly, fund extensions are now being approached as a genuine two-way discussion. Another area that has grown in importance is corporate governance and responsible investment."

So what many would have perhaps conceived as a battle of wills is being approached by both sides as a constructive dialogue rather than a zero-sum game. The industry appears to be taking the opportunity to refine the private equity model and ensure it works for all sides and at all stages.

The re-working of this model is evident to many: "The fear of exclusion has evaporated, LPs feel that they can now speak more assertively and be heard," observes MacKay.

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