PE professionals struggling to meet higher GP commitments - survey

The increased commitment has been driven partly by an increase in fund size, but also LPs demanding more skin in the game. Investec's Simon Hamilton said: "Ten years ago there was a sense that the average GP commitment for a fund was 1%. After the crisis this increased to 2% anecdotally but when we looked at the data we found it was more like 3%."

The average commitment actually dropped slightly from 3.3% to 2.9% in the last year, but this is still above the historical average and is more than compensated for by the increase in fund size, as 55% of respondents expected their next fund to be 25% larger and 12% expected it to be twice as large.

"The other big change is that it used to be senior partners that were being asked to make these commitments but what we see now is that more junior employees at the firm are being asked to make a commitment, and in some cases the commitment size will be proportionate to the share of carry that individual is entitled to," said Hamilton.

This brings additional challenges as younger employees of PE firms have not had the wealth accumulation time of their more senior colleagues and have other pressures on their cash flows such as investing in the GP for succession reasons.

Solutions
One way of solving this is to invest carry from a previous vehicle, but this brings about potential conflicts, Hamilton said: "You don't want fund investment and divestment decisions being made based on the liquidity needs of the individual making them and this is a risk if GPs go down the route of funding their commitment to the latest fund with carry from the last."

Historically, the more senior partners would lend to junior employees directly to help them meet their commitments, but this comes with its own difficulties. Therefore banks like Investec will lend to the GP for this purpose. Hamilton compares the kind of facilities offered to credit lines secured by GPs to bridge capital calls to their LPs: "These are liquidity facilities rather than leverage facilities and the pricing reflects that. They have a similar function to capital call facilites in some respects, with the key difference being that there is more necessity. A capital call facility makes things more efficient but you would hope that your LPs would be able to meet the call at any time."

Investec has been in the space for some time, but does see some competition from private banks. "Lending to GPs is our heritage and it's quite a complex area. We do see the private banks of the senior partners getting involved in it sometimes but it is a very specialised space and you only have to look at the news to see the risks of over-leveraging a GP," said Hamilton.

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• Topics
• GPs
• Financing
• LPs
• Investec