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Private Equity Investors Want GPs to Put More Skin in The Game. GPs Might Have to Get Creative to Afford It.
Private equity managers without a stellar track record might struggle to raise capital from LPs if they don’t invest proportionally into their own funds.
For a lot of private equity investors, the best protection against losses is to make sure their general partners have enough invested in their own funds so that GPs won’t emerge unscathed from negative returns.
The average GP commitment reached 4.8 percent in 2021, according to the latest GP trends survey from Investec. That’s already double the typical expectation of 1 to 2 percent. But according to Thomas Liaudet, partner at the private markets advisory firm Campbell Lutyens, limited partners are even expecting more commitment from GPs as the private equity industry navigates slowing economic activity and a lack of good investment targets.
“There is an increasing demand from the LPs to see a material GP commitment,” Liaudet told Institutional Investor in an interview. He added that the more senior GPs who oversee the capital teams at private equity firms are especially expected to invest in their own funds.
The growing PE fund sizes are only adding to the pressure for GPs to commit a proportional amount of capital. The average PE fund size rose from $210 million in 2016 to $340 million in 2021, according to McKinsey’s latest private markets report. The top 20 fundraisers that closed their funds last year only spent 35 months on fundraising, closing funds almost twice as quickly as they did five years ago.
“GPs are raising bigger funds, sometimes faster,” Liaudet said. “Suddenly, the pressure on GP commit at the top level is very strong.”
For those GPs that are struggling to meet GP commitment demands, one solution has been to sell stakes in their firms to managers like Dyal Capital and Petershill. Liaudet said that Campbell Lutyens has seen an increasing number of mandates involving PE firms raising minority equity capital in the past year, and part of that capital has been used to fund increasing GP commitments.
Sean McKee, national leader of public investment management at KPMG, told II that the commitment pressure is particularly tough on PE firms without good track records. “While general partners to private equity funds are often asked to increase their funded GP commitment by certain limited partners, those with a stellar track record are often able to avoid fulfilling such requests while still receiving the investment,” he said. “However, for those without the same level of investment track record, it can create a need to commit more capital in return for the investment by a limited partner.” He added that although there’s increased pressure from LPs, it is still early to tell whether there will be significant growth in GP-funded capital commitments.