Liquidity Tension Between LPs and GPs Persists

“It’s always problematic if GPs don’t get LPs and vice versa. What’s worse than that is when they think they know but they don’t.”

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Illustration by II (Getty Images photo)

Tough markets have sparked tension between investment managers and the allocators who supply them capital.

With liquidity tough to access on both the buy and sell sides of the market, the delicate relationship between limited and general partners may be more balanced than it used to be — but that doesn’t mean things are easy.

“This is a gnarly market,” said NEPC managing director Sarah Samuels. “It’s not one we’ve seen in a long time... We’re all being tested.”

Samuels spoke alongside Steve Moseley, managing director at GP-stakes firm Wafra, at the SALT Conference in New York on Monday. The two have worked as both allocators and investment managers in different phases of their careers and spoke about where the tension lies between the two roles today.

Samuels recounted attending an event a few months ago with venture managers, limited partners, and portfolio company leaders and the three groups had a candid conversation about the disconnect between LPs and GPs — and how the two could better understand one another.

“GPs think LPs want liquidity because they’re being greedy,” Samuels said. “LPs think GPs are being greedy by not giving them liquidity.”

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According to Samuels, the allocators didn’t quite understand everything going on in venture capitalists’ portfolios. Meanwhile, the venture managers didn’t have a strong appreciation of all of the things that go into managing capital on behalf of an asset owner. The GPs were surprised that allocators must contend with governance and overall liquidity needs of an organization on top of broad portfolio management, she said.

“It’s always problematic if GPs don’t get LPs and vice versa,” Moseley said. “What’s worse than that is when they think they know but they don’t.”

Moseley admitted to making that mistake personally in the past. When he moved from a private equity firm to the Alaska Permanent Fund Corporation in 2014, he promised to get back to every manager whoreached out within 24 hours. As his inbox swelled, that became 48 hours, then 72, then eventually, he became one of the LPs he was frustrated with as a manager: The person who never responded to emails.

“I’m much more sympathetic,” he said. “It highlights the difference between well-resourced GP land and chronically under-resourced LPs.”

As for the liquidity problem? According to Samuels, LPs have found ways to commit, even if they have to write smaller checks than previously given liquidity constraints. But for those that can, there is immense opportunity.

“On the opportunity side, this is one of the best times to put your capital to work, but it feels really scary,” she said.

She added that early-stage venture on the equity side and workouts in the private credit markets are attractive areas for LPs to put capital to work right now.

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