GPs are from Mars, LPs are from Venus

I’m not saying GPs and LPs need to go into relationship counseling, but they should at least jump on a phone or Zoom call.

It is hard to come away with any other conclusion after reading the new Investment Funds Outlook Report from Barnes & Thornburg. The law firm polled 125 GPs, LPs and service providers about the fundraising environment for private funds.

It should come as no surprise that the report concluded that, “Limited partners have bolstered their negotiating power as general partners compete for capital allocation – a dynamic that has also turned up the pressure on GPs in areas like succession planning, fees and expenses, transparency and ESG investing.”

What surprised me about the report is that GPs and LPs have sharply different views as to the “most pressing issues that GPs are currently facing.” Out of a list of 10 issues, most LPs (58 percent) identified fundraising as the most pressing issue for GPs. The other issues that made it into the top five were returns (54 percent), valuations (42 percent), succession (38 percent) and transparence (31 percent).

GPs, on the other hand, ranked fundraising as their fifth most pressing issue, tying it with staffing at 24 percent of those surveyed. They said their top issue was returns (40 percent), followed by valuations (39 percent), regulatory risk (33 percent) and succession (28 percent).

I asked Scott Beal, a partner at Barnes & Thornburg and co-chair of its Private Funds and Asset Management Group, what he made of the apparent disconnect. Are GPs and LPs just not talking to each other as much as they should?

“Over time, communication has gotten better between the GP and LP community, so I don’t know if I would attribute it to that across the board,” Beal said. “It probably has more to do with the fact that there are different businesses on each side and different priorities. And maybe there’s a delay in LPs and GPs getting synced up. If LPs’ preferences and demands change, it may take a longer period for that message to filter through.”

More to the point, if a GP is out fundraising right now, “You’re going to have a better sense of what LPs want,” he added. “But if you’re a VC manager that’s not raising, you’re not going to get the same feedback.”

We continue to hear about challenges from VCs that have recently closed funds. For example, we reported this week that emerging manager Big Sky Capital was able to meet its target of $20 million for its debut fund, but it didn’t close it without a bit of drama. Late last year, some LPs put their commitments on hold or backed out entirely after the collapse of FTX and fears about the global economy, firm co-founder Jahn Karsybaev told my colleague Ryan Hibbison.

What sorts of changes should GPs expect when they talk to their LPs?

For one, fund extensions are no longer a slam dunk. “For a fund extension that may have flown through a couple of years ago, people are asking harder questions now,” Beal said. Just 23 percent of GPs and LPs combined said they saw fundraising extensions in the previous 12 months, but 45 percent said they expect to see fundraise extensions “increase significantly” in the next 12 months, and another 35 percent said they expect to see them “increase slightly.”

GPs should also expect to have to pony up more for their GP commitment to a fund. Only 17 percent said they said they saw a change in GP commitments in the previous 12 months, but 44 percent said they expect to see those commitment sizes “increase significantly” in the next 12 months, and another 31 percent said they expect to see them “increase slightly.”

“Across the board, more attention is being paid to the amount of the GP commitment – where it’s coming from and do we think it’s an appropriate alignment of risk for the amount that’s being put to work alongside LPs,” Beal noted.

Following a very difficult Q1 for fundraising, general partners who plan to be in the market this year or next would be wise to get with their LPs to make sure they are still speaking the same language.