1 LPs have evolved and are becoming more than capital providers: LPs need to develop a strategic relationship with GPs and leverage it to the greatest possible extent. Alcina Goosby, Senior Investment Officer at NY State Retirement, said, “GPs are information sources: they are out in the field, they are the advisors, the ones doing the research and the ones going out and deploying the capital.”
2 LPs insist on co-investing: “They are asking for more co-investing. Every single one of our side letters has co-investment language in it,” said Blinn Cirella, CFO at Sawmill Capital. SEC has shown interest in co-investing, and that has been one of the factors that have influenced LPs. Co-investing creates a difficult compliance task for the GP, as there is typically a requirement to provide the interested LP’s with a term sheet up to 30 days in advance of the deal closing. “Everyone wants co-investments, but the infrastructure, the process, and the personnel to process co-investments is a big hurdle,” said Dina Said Dwyer, Founder and Managing Director at EDEN Capital. LPs need to have everything before the GP acts on it. There are LPs who have their own in-house co-investment team, and some others have a co-investing manager.
3 Large institutions and family offices are looking to invest directly: “It’s an interesting relationship. On one end, LPs invest with the GPs and on the other end, large LPs are starting compete with the GPs. That is the new reality and it is not going away,” said Dina Said Dwyer, Managing Director at EDEN Capital. Some groups are apprehensive about family offices directly funding them, whereas others would prefer direct funding because then they can have a more flexible structure and ownership for a longer period than they would have had with a fund. So that they aren’t directly competing, most individuals who invest with independent sponsors have allocations for GPs as well.
4 Increase in fundless sponsors: “More and more, you are seeing the participation of fundless sponsors. I think the genesis of that is the diaspora of bankers from large firms who have sector expertise they can leverage. They generally have family offices and institutions behind them who see the sponsors as another source of deal flow,” said Nancy Hament, Partner at Scura Paley. These bankers use their family offices and large institutions’ investor contacts to raise funds after finding opportunities and doing their due diligence regarding the investment. The independent sponsors might even have a fixed amount per annum instead of funds based on the deal. Family offices can use independent offices as a means to pay less in fees, access a particular sector, get closer to a deal. Independent offices can also help family offices that aren’t comfortable directly investing or do not have the time to do the due diligence before investing.
5 LPs demand more involvement with GPs: There is an increase in data requests from LPs. “They are pushing harder on terms and pushing their views on how we should use credit or not use credit at the fund level,” said Blinn Cirella. In addition to this, LPs are also focused on paying minimum fees and demand 100% offset. While considering the transparency on the fees and possibility of ratings on GPs, “I think we need to be careful about how we present information to the LP community. Every firm does things a little differently, which creates for an environment where data can be easily misinterpreted,” said Blinn Cirella.