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LP Relations Are All Talk, No Action

It seems that general partner talk about so-called LP relations is just that. A lot of talk.

If you’re a limited partner in a buyout fund, it’s general partner is probably contacting you a lot more frequently to chat, as a part of its new LP outreach program. In case you haven’t heard, you LPs have the upper hand again.

As reported here and elsewhere, LPs are hungry for some major changes. They want mega-funds to reduce the size of their funds and give some of those commitments back. They want GPs to reduce their fees and increase the GP contribution to each fund. They want stronger key man provisions, a “waterfall” carry distribution that is not deal-by-deal, and distribution with a preferred return. They may even want lower hurdle rates and smaller carry percentages. They have even discussed the idea of pre-emptive claw-backs comparable to the venture bubble fallout.

Yet, with the exception of just a few firms, the only concession GPs have offered is a bit of their time. The most common LP relations step buyout firms have taken to date is “better communication.” They’re warning of potential capital calls further in advance and giving investors a better sense of portfolio company performance. They’re even writing letters to declare they’ll be writing more letters. And that’s all good and well, but where’s the action?

Thus far, the only firm’s to reduce their fund sizes are TPG and Permira, both for outlier reasons. Permira offered it without offering a proportionate fee reduction, as a way to accommodate its largest investor, a distressed BDC called SVG Financial. Meanwhile TPG offered a generous 10% reduction with fees included. That was basically a mea culpa for a portfolio that includes peHUB’s official “Worst Deal in Private Equity History,” Washington Mutual.

Meanwhile, TA Associates lowered its carried interest. LPs I spoke with were hard-pressed to come up with further examples of a firm lowering its carry rate.

What will it take for more firms to follow suit and go beyond “talking the talk?”