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How Top Private Equity Firms and LPs Build and Manage LP Relationships
The private equity landscape has undergone a phenomenal transformation over the past decade. As the private equity landscape has evolved—growing from approximately $1 trillion in 2003 to nearly $5 trillion at the end of 2017—so too have the relationship between general partners and LPs. Now, more than ever before, managing general partner/LP expectations relationships is critical to success.
Due diligence gains even more importance
LPs have become even more diligent in recent years. With the woes of the financial crisis still lingering, LPs are especially keen to avoid downside scenarios. They are conducting due diligence rigorously and prioritizing specific factors. According to Private Equity International's LP Perspectives 2019, GP track record and GP team size are the major consideration factors, of critical importance for 98% and 92% of LPs, respectively.
Another critical diligence factor revealed by Private Equity International’s study—one that is often overlooked by firms—is firm culture. Well of over (61%) of LPs say culture plays a significant role during their due diligence. Jean-François Le Ruyet, a partner at Quilvest Private Equity, explains, “Culture determines where the GP is going to be different from others, so it’s the number one factor I’d look at. Recent events and scandals have made operations and compliance, which is tied to culture, so important.”
In order to build and grow relationships with LPs, firms must not only build a strong firm culture, but they must also vocalize and communicate what makes it strong and unique.
Relationships are paramount
While historical performance is a critical factor during the due diligence process, it loses importance after a relationship has been established. As LPs consider whether to re-up, their focus shifts to center on fees and relationships, both of which trump historical performance in terms of importance.
Firms intent on forging strong and long-lasting relationships with LPs need to place relationships on a pedestal. Investing in a relationship intelligence platform such as Affinity can move waters in terms of streamlining and strengthening relationships. Using Affinity’s patented technology, firms can ensure that relationships remain strong and they never miss a follow-up with their LPs or strategic partners.
Importance of Monitoring
The onus is also on LPs to ensure that relationships with firms are strong. According to Carmela Mendoza of Private Equity International, it’s especially important that LPs build and leverage three critical skills—negotiation, information exchange, and performance monitoring—all of which LPs fail to sufficiently leverage at the moment. Research has shown that 35% of LPs do not seek improved alignment with GPs in terms of key factors such as performance fees — underscoring the need for improved negotiation.
What’s more, over half of LPs use a simplistic, antiquated spreadsheet for position monitoring. This is a recipe for disaster and breakdowns in communications often occur due to lack of visibility into GP relationships. Investing in a centralized, easy-to-use database can help improve confidence, sentiment, and, ultimately, relationships.
In recent years, we’ve seen a strong consolidation trend, with LPs concentrating on fewer GP relationships. It’s more important than ever before that private equity firms double down on strengthening LPs relationships. The results will quickly follow.