The Diminishing Denominator Effect?

Yesterday, I wrote about how some of Sun Capital Partners’ investors are asking for a fund size reduction (talks are very early, with no actual proposals on the table). Here’s what one of its LPs said:

“It’s really the larger LPs who are having liquidity issues, which is as much of a driver here as anything. They probably want all of their GPs to cut fund sizes, but you have to pick and choose.”

This is the old denominator effect argument, in which exposure to illiquid PE investments has become more pronounced due to the falling value of public securities. It’s something peHUB has discussed and validated ad nausea, but are we nearing a point where it becomes more of an excuse than a legitimate pain point? After all, the public markets are up around 60% from their March lows, which means the denominator effect should be easing a bit. Again, not eradicated – but diminished.

To be clear, I’m not saying that LPs shouldn’t be asking Sun for a fund size cut (they should, and Sun should either comply or work out an alternate arrangement on fees). But I do wonder if the driver in this case is largely residual…