Investors Are Getting Some Negotiating Power Back. But Not as Much as You Think.

Limited partners in private equity funds expect the scales to tip a bit back into their favor amid challenging market conditions.

Illustration by II

Illustration by II

After years of being subject to fundraising terms dictated by asset managers, investors may finally have some power in the deal negotiation process.

Seventy-five percent of investors believe that for fundraising negotiations, the balance is about to be tipped in allocators’ favor, a recent survey of 125 limited partners, private equity firms, and service providers by law firm Barnes and Thornburg showed.

“There are fewer LP dollars being allocated,” said Kerry Potter McCormick, a partner at the law firm. “There’s more competition among fund sponsors to attract those dollars to their strategies and products.”

Jennifer Choi, chief executive officer of the Institutional Limited Partners Association, said market conditions are expected to prompt a shift in fundraising dynamics. But she said there hasn’t been a wholesale shift in how business is done between private asset managers and their investors.

“Broadly speaking, there’s a shared expectation that the ability of LPs to secure more favorable terms than in the past should be increasing, but we are not yet seeing a wholesale shift in favor of the LP in any notable way in terms of any specific terms,” Choi said. “It always comes down to the specific dynamic of LP and GP.”


Currently, there are investors in three different situations, according to Choi. There are those that are cutting back on private market allocations and selling investments on the secondary market. These investors aren’t allocating new money.

Then there are those who have capital to deploy but are constrained by timing. They may have to wait until the fiscal year ends before putting more money to work. If this does not align with private equity firms’ fundraising deadlines, then the investors likely won’t be able to get the deal terms they want.

Finally, there are those who are “in the money,” as Choi puts it. These investors can likely negotiate for better deal terms, or at least can access managers and strategies they might not otherwise receive allocations from.

“I think one is that LPs to find themselves in a position to commit, they are seizing on the opportunity to get allocation and access,” Choi said.

Smaller and less established limited partners may be satisfied with access to top-tier funds. But others are using their newfound power to get improved transparency and access to unique fund structures. “It’s about access, but it’s also about the ability to ask for significantly lower or in some cases no fee co-investments,” said Scott Beal, co-chair of Barnes & Thornburg’s private funds and asset management group.

“We are seeing a resurgence of some alternative structuring that I haven’t seen in a long time,” Potter McCormick said. She noted that co-investments have been on the rise for years, and for investors who can act quickly, they can be a beneficial way to improve deal terms.

However, Choi added that co-investment terms may not be as favorable as they seem on the surface. Private equity firms may agree to include co-investment provisions in contracts. But the contract language indicates it’s only a consideration. That means if the firm decides to do a coinvestment, it would allow an LP to be a part of it. But it doesn’t require the manager to offer co-investments.

Choi also noted that no-fee and no-carry deals on co-investment strategies are becoming rarer.

Potter McCormick said that there’s an increased use of side cars, which typically charge lower fees and give the investor the ability to say no to any of the fund’s investments. “That can be very attractive to certain LPs and can set fund sponsors apart from the pack in a tight fundraising environment,” she added.

Limited partners also are gaining visibility into side letters. “LPs are really focused on transparency right now,” Potter McCormick said.

More than half of the 125 LPs and GPs surveyed by Barnes and Thornburg — 68 percent and 70 percent, respectively — said they expect that there will be more transparency in their relationships with private equity firms in the future.

The proposed private funds rule — which may be finalized this month — likely is pushing allocators to ask managers to see not only the side letter provisions that they have personally elected but also all side letters with other investors. According to Potter McCormick, LPs want to see all the redacted side letters, even if they can’t view the specific provisions in them.

LPs are asking for transparency beyond side letters, too. Recently published data from ILPA shows a massive increase in LPs calling fee and data disclosure a “must-have” in negotiations. In 2020, 19 percent of respondents said it was a necessity; in 2022, that number was 51 percent.

While some limited partners, as Choi noted, may not be able to ask for things like more transparency or alternative fund vehicles immediately, they are still taking advantage of the changing fundraising environment.

“Some LPs are being forced to take a look at their portfolio and manager relationship because they are constrained,” Brian Hoehn, senior research associate at ILPA said. “Within these fundraising experiences, they’re looking at how GPs have acted in previous fundraises.”

Institutional Investor previously chronicled some of this behavior: Several asset owners reported in the spring of 2022 that general partners were pushing them to allocate capital to their sub-strategies or side funds. If they chose not to, the asset owners — some of whom had partnered with these managers for years — were cut off from the flagship strategies.

“LPs are reflecting on how GPs behaved in the good times of the recent past,” Choi said. “They’re thinking about how quickly they came back to market, and how hard nosed the negotiations might have been. LPs do have long memories.”