LP staff capacity plays large role in consolidating commitments to fewer funds, report says

Limited administrative capacity has contributed to LPs committing greater amounts to fewer funds, according to a new report from adviser MJ Hudson.

While the large number of funds returning to market has calmed in recent weeks, many allocators have suffered from “LP Fatigue” as limited staff have been stretched dealing with the tasks that are required when sorting out and choosing possible commitments to managers.

According to MJ Hudson’s Private Equity Fund Terms Research report, over $700 billion in capital was raised by private equity managers in 2021, more than in previous years. However, roughly 1,500 funds were in the market during this time, down from levels seen pre-covid.

“It’s generally more efficient for LPs to consolidate relationships. One of the reasons why is administrative. It’s just easier for LPs to manage fewer relationships,” said Whitney Lutgen, a partner at MJ Hudson.

Lutgen added that the PE industry’s growth has created a talent crisis.

“We need more talent. And the industry needs to properly recognize the value of allocating skill. A lot of institutional investors are short-staffed,” Lutgen said.

MJ Hudson’s report focused on funds that came to market or closed in 2021. The firm advised either the fund’s manager or a potential LP.

The consolidation of relationships has also resulted in GP commitments to funds increasing over time.

According to the survey, 80.9 percent of GPs committed more than 2 percent into a fund in 2021. In past years, that figure neared 65 percent.

“There are more GPs who are very successful coming back to market with a larger fund having delivered good returns. Since firms are successful and have harvested their carry, they can reinvest this back into their next fund. Investors in turn argue that these GPs can then support a higher commitment on their end,” said Rob Eke, a partner at MJ Hudson.

This year’s fundraising slowdown was not factored into the data as the report only included figures for 2021.

The fundraising slowdown, along with the impact the denominator effect has had on limiting many public pension systems, has forced managers to look to non-traditional areas outside of institutional investors, Lutgen said.

“That’s one of the reasons why there has been a big push into retail and high-net-worth investors. Typically, they won’t have the same allocation issue required to balance portfolios,” Lutgen said.