SVG doubts permanent shift in LP/GP relations

Early last year, the Boston Consulting Group published a report that predicted 30-40% of GPs would disappear. However, despite a few notable victims of the crisis, this has not yet come to pass.

For instance, France-based investor PAI, which last year had to significantly reduce its latest fund and freeze its investment phase following the triggering of the key man clause, is still in business.

Candover is another example; in March this year the firm may have been able to announce an 8% increase in its shares, but not before formally confirming the termination of the investment period of its 2008 fund in January. The fund had been seeking to raise €5bn and had held a first close on almost €3bn in late 2008. The only investment in the fund is the €2.6bn buyout of oil services business Expro. During 2009, the troubled investor even withdrew its investment from its own 2008 vehicle.

"The disappearance of 30-40% of GPs was perhaps a bit exaggerated. Indeed, even in the worst of cases, things are not as simple as dismissing a manager, and many LPs would be reluctant to take this option," noted Sam Robinson, director of private equity at SVG Advisers.

He continues, "In most cases, the decision requires a consensus of least 75% of LPs; this becomes a difficult feat if one takes into account the many strategic interests at stake as well as cultural and geographic barriers. Furthermore, the issue of who is left to manage the existing portfolio needs to be duly addressed to the satisfaction of the majority of LPs."

Indeed, rather than see fund managers implode across the industry, we have instead seen new players appear. Take, for example, Jon Moulton's Better Capital, which was founded in October last year and has recently completed two transactions.

Furthermore, in the second quarter of 2009 IMAS recorded a doubling in the number of FSA authorisations for private equity companies. These included Stanley Fink's new venture, BriceAmery, a shariah-compliant fund, and Deutsche Bank's former cleantech team.

Are the prophesised changes in LP/GP relations going to follow a similar path; one where the shift in favour of LPs is at best a passing event?

"At the moment, LPs have more power but it remains uncertain whether this will remain the case 12 months from now. In the last downturn it appeared LPs had the upper hand but this was short-lived and the only material effect was that transaction fees generally changed from 50:50 to 80:20 in favour of LPs.

"The fundraising market today is probably the most difficult it's been, but unless LPs present a united front, any agreement that would see dramatic changes in terms is unlikely," observed Robinson.

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