LP/GP relations: Communication breakdown?

The research conducted by placement agent Acanthus - surveying 33 LPs and 27 GPs - doesn't come to revolutionary conclusions: both sides of the partnership still tend to have a divergence of interest on many key aspects, including fees and corporate governance clauses.

Yet they overwhelmingly agree on at least one point: 91% of LPs and 100% of GPs surveyed agree that the quality of communications is an important factor in an investor's decision to commit to a fund. This reassuring show of unity stops there though: up to 40% of LPs described GP communications around areas such as underperforming investments, team changes and strategy changes were poor - unsurprisingly, not a single GP shared this concern.

In fact, GPs seem to be rather proud of their efforts. Two thirds reckon their communication on underperforming investments was good last year (12% if you ask LPs). Nearly 80% think they did a good job relaying information about changes in investment strategy - barely one in ten LPs agrees. The biggest gap comes with communications regarding changes in team size, new hires and departures: 85% of GPs believe those were good, when again less than 10% of investors agree. Reporting is also a divisive issue, with almost a fifth of LPs stating it was not satisfactory in the past 12 months.

Acanthus managing partner Dermot Crean stresses that some managers are clearly lacking when it comes to communicating with LPs: "We see it a lot informally in our dealings with LPs, and also when looking at how prospective clients report. We generally find that the larger houses are better at it, while smaller houses can be under-resourced and perhaps not as efficient - it's a broad generalisation of course, there are good and bad examples at all levels."

While there was a strong focus on just being a good dealmaker in the boom years - especially in the mid-market - it would seem that some GPs have failed to catch up with a radically different environment post-crisis. Crean recalls the example of a manager who thought it would never need a placement agent a few years ago - it would just do its business quietly and LPs would rush to invest. The same GP changed its tune considerably this year, realising that dealing with LPs was now about half of its business.

Could the ILPA principles and a nudge from the PE trade bodies help managers see the light? "ILPA principles will certainly help, as will the EVCA guidelines," agrees Crean. "We have seen some pretty dreadful examples of reporting in the past, where you would only get three lines on the performance of your investment - you get more from a VCT than you would from some PE players."

But reporting is only part of the equation - investors want GPs to be more transparent and honest on all aspects of business, be they positive or negative. Crean highlights that, in the currently tough fundraising environment, managers are potentially wary of opening up too much to LPs and jeopardizing future re-ups: "I guess it all boils down to being confident about where you are with your LPs - and at the moment managers are nervously looking at investors, wondering what is going to happen. Part of the problem is that GPs only have a limited perspective on LPs. They don't see what LPs are seeing across the board: that everybody has problems of some sort from time to time, and that it is just a part of the business."

Two-way street

Being a partnership, the LP/GP relation requires trust and communication from both sides. Interestingly, managers surveyed by Acanthus are not particularly impressed by their investors' performance in that regard: over a quarter of GPs responded that LP feedback was poor in 2011, while only 6% of LPs agreed. A third of investors thought it was good, but the majority (64%) only rated the clarity and effectiveness of their own feedback as average.

It appears that no matter how many gripes they have about the relationship, LPs sometimes fail to convey those feelings to managers efficiently. "We have seen cases where LPs would say a lot of things to us informally and voice their concern on some burning issues - then you would turn up at an AGM and there wouldn't be a single question coming from investors, on anything. Many of them could do better in expressing their views transparently to GPs, as our survey shows," notes Crean.

LP/GP relations have never been particularly straightforward, and could remain so for some time as the various players adjust to each other's new expectations. In one of the survey's positive findings, 58% of LPs and 37% of GPs believe the investor relations process has been more effective in 2011 than in previous years - highlighting efforts on both sides towards a more constructive partnership.

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