PE Fund Investors Still Seeking the ‘Holy Grail’

(June 4, 2010) — Private equity fund investors are still in search of the ‘holy grail’ where their interests are precisely aligned with the funds investing their capital, according to various investors who spoke Thursday at the 2010 Super Return US conference in Boston, Reuters reported.

Investors, known as “limited partners” (LPs), are witnessing better returns in their fund agreements since the financial crisis put a damper on fund returns, giving investors more bargaining power to negotiate terms. Yet, some question whether LP interests are perfectly aligned with the firms investing their capital. Furthermore, concerns about liquidity and capital overhang may keep the flow of new money to modest levels.

LPs and private equity executives, known as “general partners” (GPs), have acknowledged a shift in power from the days when GPs had more leverage to control terms as investors struggled to get into their funds.

“Everything is up for discussion today,” said Smith, speaking at the conference, to Reuters. “At the end of the day, it will come down to the balance of power — if funds can generate compelling returns they will have more leverage in the equation.”

Collette Chilton, chief investment officer at Williams College, said at the conference: “I think GP-LP alignment is the holy grail that we all talk about but may never see.” She added that while GP behavior during the crisis was often unfriendly, some GPs have done positive things since the crisis, such as limit the fund sizes they raise and provide more readily available liquidity than they might otherwise have done. Chilton oversees the Massachusetts-based college’s $1.6 billion endowment.

In related news, a survey last month from IE Consulting showed a majority of pensions believe misalignment of interests with their private equity managers (GPs) had become more apparent during the crisis. While two-thirds of the schemes surveyed thought the crisis had caused fund managers to act at odds with LPs’ interests, three-quarters of the pension funds felt their private equity managers had tried to blame the financial crisis for their own investment mistakes. Looking ahead, respondents to the survey said the fundraising environment would become increasingly tough, when GPs will face more difficulties raising a new fund in the next two years.