Institutional investors seek more 'skin in the game' from GPs in volatile markets
As private equity and venture capital markets stay volatile, general partners (GPs) are stepping up their personal financial commitments to boost limited partner's (LP's) confidence.
"In a competitive fundraising market, GPs need to demonstrate confidence in their investment thesis by 'putting their money where their mouth is,’” Thomas Kim, partner at Dechert law firm, told AsianInvestor.
Meanwhile, Jimmy Phoon, executive director and CEO of Seviora Holdings, highlighted a trend in Asia towards GP stakes investing, a strategy previously more popular in the US and Europe.
"We note that GP stakes investing is picking up in Asia," he said.
Seviora Holdings
GP stakes—a strategy where institutional investors buy minority shares in a GP's management company—provide asset managers with long-term capital while preserving control over investment decisions.
This is particularly valuable as GPs commit more personal capital to funds; selling stakes gives them liquidity to boost these commitments, aligning with LPs' desire for "skin in the game," Phoon told AsianInvestor.
He added that Seviora, a $55 billion Singapore-based group backed by Temasek, prioritises strong GP alignment when it commits to funds or launches its own.
“For first and second vintage funds, a meaningful GP financial commitment continues to be essential,” Phoon said.
Lydia Hao, managing director at HarbourVest, also reinforced the importance of GPs increasing their "skin in the game" for building trust with LPs.
"A higher financial commitment by the GP to the fund is perceived positively by LPs as it increases GP-LP alignment of interest,” Hao explained, adding that LPs also look at each senior partner's individual commitment to gauge their conviction.
HarbourVest, a private markets firm, managed over $132 billion in assets as of June 2024.
Phoon agrees, adding that “LPs prefer GP commitments funded by the key investment decision-makers rather than balance sheet commitments or other sorts of funding."
STRUCTURING COMMITMENTS
In response to increasing expectations, GPs are innovating how they structure and fund their commitments.
Dechert
Traditionally, GPs have funded these contributions in cash, but Dechert's Kim noted that flexibility is growing in the market, allowing GPs to fulfill their commitments through management fee offsets.
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Seviora's Phoon also pointed out that some GPs are increasingly using creative financing strategies, including divesting portions of their shareholdings to external parties or bringing in new anchor shareholders to fund higher commitments.
“This approach not only enhances alignment but can also strengthen a GP’s position in the eyes of LPs,” said Phoon.
A 2024 survey of GPs by Investec showed that more than 15% GPs did not know where their commitments were coming from.
BALANCING RISKS
The rise in GP commitments is not without its challenges, especially as market uncertainty grows. Larger GPs are working to mitigate individual exposure to such high-risk commitments through innovative approaches like employee co-investment schemes.
This helps spread the financial burden, creating a more resilient structure for the GP team and enabling junior members to align their interests with those of the senior GPs, according to Kim.
Phoon added that LPs are wary of certain structures, particularly when GP commitments are heavily deferred through management fees rather than cash.
Deferred commitments, though common, may indicate less direct financial exposure for GPs, which can reduce the perceived alignment of interests.
As Hao at HarbourVest noted, a balance is crucial.
While higher GP commitments are usually positive, "excessive personal commitment might lead GPs to either take undue risks when investing the fund, or make decisions that protect their own capital rather than optimising the overall fund performance," said Hao.