Early last week, secondaries investor
Among the survey’s findings:
• 20% of LPs plan to reduce their allocation to private equity this year;
• almost one-third of LPs are reducing the number of their GP relationships over the next two years:
• nearly 85% of LPs say they won’t reinvest with some of the GPs in their existing portfolio base;
• and 65% of LPs expect to see more favorable terms heading their way.
Many money managers who aren’t changing their long-term PE policy allocations are already over their target allocations. For them, slowing the pace of their commitments is a necessity, according to two prominent LPs who spoke with PE Week last week, but asked not to be named.
But LPs are also using the slowdown to evaluate their relationships, and some are divorcing themselves from certain GPs. For example, the head of a large endowment tells PE Week that his staff is drastically cutting the number of its managers in private equity and venture capital for various reasons ranging from “general lack of performance and misaligned interests, all the way to reasons falling under the general heading of bad attitudes and all-around misbehavior.”
The LP adds: “ In a bizarre way firing managers can be cathartic during these trying times.”
A second LP echoes the sentiment, saying that its pace of investing has slowed related to the overall slowdown in the fund-raising market.
The more favorable terms are more than wishful thinking, say both LPs. The endowment manager insists that “we’ll be seeing better terms because we’ll only invest [now] in managers with extraordinary long-term results or bullet-proof terms demonstrating shared values and aligned interests.”
The second LP is already seeing more managers agreeing to a change in terms that benefit the LPs. Some of the changed terms have to do with fees and carry. But keyman provisions are also being adjusted. More LPs are also “putting specific dollar caps in the limited partner agreements, stating the maximum size of the fund and the minimum dollars raised before the GP can draw any capital,” says the LP.
Do VCs need to be concerned? Yes and no, according to a Palo Alto, Calif.-based VC whose firm has delayed fund-raising this year and asked not to be identified.
“Let’s be honest,” he says. “The real issue with VC is that LPs are mostly upside down right now, and the venture returns have sucked.”
At the same time, says the VC, there’s plenty of reason for longer-term optimism, beginning with the fact that venture capital as a percentage of most LP portfolios is very small. Last year, venture firms raised $28 billion for 211 funds, according to the National Venture Capital Association and Thomson Reuters (publisher of PE Week).
Even though the industry attracted much more capital ($35.5 billion) in 2007, the amount is still a pittance compared with the $265.6 billion raised by buyout firms last year, or the $325.8 billion they raised in 2007.
“[VC firms] are a small fly on the back of an elephant,” the VC says. “And the fly can always find some food.” —Constance Loizos