Fundraising power balance shifts to LPs – panel

"I always thought that LPs gave money and went away," said one emerging manager, citing experience from their prior work at a large investment manager. "Now there is a stronger participation in what LPs want to do in their own strategy."

The Two and Twenty model is yet to change in practice, said the speakers during panels held yesterday in Amsterdam. However, LPs are now negotiating first close discounts and fee breaks, exception mechanisms to avoid commitments in individual transactions, paying fees on funds invested instead of funds committed, and a decrease in ‘super carry' that has in recent years been set at 25%-30%, said one private markets investor.

The change is driven by exploding inboxes from a slew of managers returning for re-ups and pressure to diversify to emerging managers, leading to an overall shortage of capital. Buyout funds in Europe are set for a poor year of fundraising with just EUR 100.5bn raised so far – 53.2% behind 2021's total

Some LPs have also started to discuss taking a stake in a GP if they make a cornerstone commitment to a fund. Others are demanding more co-investments throughout the life cycle of the fund, be it through GP-led secondaries or new platform investments. According to one LP panellist, they declined to re-up in a case where a GP had promised co-investment opportunities on an earlier fund that did not materialise.

Beyond performance
LPs are also demanding more transparency and reporting on investments and funds. This goes for financial metrics, such as demanding to know whether or not there is a credit line in place; and non-financial metrics, like ESG performance.

For example, LPs are being more cautious about committing where GPs lack diversity. The investment committee at one UK pension fund has questioned some re-ups because the GP did not have a woman on its own investment committee, despite it being multi-ethnic, for example.

Being a top-ten percentile performer is no longer enough on its own to get the attention of LPs, said one GP about to return to market for its second fund. Co-investment is one way LPs attention, and you cannot solve fundraising problems with discounts alone, said another GP.

"There is a shift already, but there is more to come," said the same private markets investor. "LPs don't have unlimited cash, and you have to push for allocation. There are too many funds with too big targets."

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