LPs could push harder in negotiating with GPs – report

Private equity investors need to step up their negotiating skills, information exchange and portfolio monitoring, a report by eFront has found.

According to The LP Proficiency Survey, more than a third (35 percent) of LPs did not seek better alignment with GPs in areas such as GP commitment, and size of management and performance fees.

The report polled 179 institutional investors across the globe including sovereign wealth funds, pensions, and high-net-worth individuals, asking respondents to rate their approach to 10 private equity investment competencies. These include manager selection, allocation, managing liquidity expectations and negotiation, among others.

According to eFront, a significant proportion of LPs focus only on very simple negotiating points (fees and structuring) while just a tenth of investors seek a segregated account or the option to make the final decision on capital deployment to a particular investment, which can be justified by the fact that the most significant negotiation power lies with those that contribute the largest sums into funds, the report noted.

LPs also rated themselves poorly in reporting; nearly half (45 percent) said they rely entirely on GP-provided material and do not seek standardised or digitised information that supports advanced analytics. Meanwhile, only 17 percent of respondents said they build their own proprietary data based on information from GPs or third-party data providers.

“With record levels of dry powder and oversubscribed vehicles, it’s a favourable environment for GPs, and LPs are not pushing as hard,” a London-based fund of funds manager told sister publication Private Equity International. Although reporting is evolving with ILPA standardisation, only large managers are able comply, while mid-market players have a tougher time doing so because they lack resources, the manager pointed out.

LPs are weakest in position monitoring, the report revealed. More than half (53 percent) use the simplest form of monitoring via spreadsheets, 32 percent use customised databases, while only 15 percent use integrated systems and analytics.

Breaking down proficiency by type of investor, fund of funds managers are the most sophisticated in most areas including negotiation (64 percent), private equity allocation (58 percent) and manager selection and diligence (46.2 percent).

Meanwhile, family offices and wealthy individuals score the highest sophistication levels in constructing the private market segment of the overall portfolio, and pension funds lead the way on measuring investment returns.

Looking at geography, North America-based LPs consider themselves most advanced in private equity portfolio construction and return metrics, while their European counterparts set high priority to return metrics and manager selection and diligence.