Barings has held hundreds of LPAC seats over the past 25+ years investing across private markets—mitigating conflicts of interests, and suggesting best practices to GPs and LPs. As the landscape has evolved, we’ve seen several trends arise—and offer the following insights.
Sell-Off of Equity Stakes
The Current Trend
In recent years, there’s been a rising number of GPs looking to sell off pieces of equity in their firms. The motivations for this vary: GPs might be looking to generate cash flow to support additional fundraising or operational activities; they might use the capital to expand into different strategies and set up the structures necessary to execute them; or they might see the benefit in gaining third party expertise. In 2018, for example, GPs cited that equity capital was primarily used to launch initiatives in new sectors and geographies, increase commitment to a fund, and seed new strategies. That said, these situations often generate more questions than answers: Will the future strategy stray from the original fund strategy? How will the current talent be retained for succession planning? Who is the incoming investor, and how will their goals and incentives as a new owner make an impact?
We encourage LPs to take a thoughtful, long-term approach to the partnership—and above all, to proactively communicate with the GP and other LPs to understand the unique dynamics of the transaction. When presented with a decision around a GP stake, LPs should dig deep into the genesis of the transaction; strive to understand the rationale driving the sale and the intended use of the proceeds; and ask whether or not the entity has proper alignment of interests with their own organizations.
Increased ESG Discussions
The Current Trend
Environmental, Social and Governance (ESG) integration into an investment process is steadily becoming a best practice of managers. However, ESG adoption can vary depending on geography and manager. Whereas European GPs tend to have a more mature approach relative to other geographies—with ESG factored into the investment process and discussed with investors at least annually—within North America, the landscape is still developing. As this has become more important to institutional investors, North American GPs and LPs are having more advanced dialogue around ESG documentation and measurement today. While these conversations often have more of a focus on the “S” and the “G” components, there’s a growing need for a comprehensive risk approach—and they are beginning to assume a heightened awareness for environmental issues as well. Additionally, due to the growing demand by LPs for transparency, GPs are incorporating better ESG monitoring and reporting as a standard practice.