Over our 25+ years of investing across private markets, Barings has held hundreds of Limited Partner Advisory Committee (LPAC) seats. From this vantage point, we offer the following insights on the issues and actions currently under debate between LPs and their GPs.
As GPs navigate the portfolio impact of COVID-19, their focus is no longer limited to raising capital, identifying new investments and managing their existing portfolios. Instead, issues of business continuity, staff well-being and capital access have become front and center, at both the portfolio company level and manager level.
Through recent and wide-ranging conversations with fellow LPAC members, we’ve found the following six topics to be among the most pronounced in the current environment. While this is not an exhaustive list, we believe LPs should take these particular factors into consideration as they manage their portfolios and allocate capital throughout the remainder of the year.
1. GPs are Pulling LPA Levers to Build a War Chest
The Current Trend: In this climate of COVID-19-induced disruption, GPs are highly focused on maintaining or strengthening their capital reserves, and increasing investment flexibility. In order to accomplish that, many are seeking LPAC support for changes to Limited Partner Agreements (LPAs)—which can include the extension of investment periods, increasing recycling provisions, loosening of concentration limits and greater use of add-on provisions for existing companies. But not only do these changes result in increased access to investment capital for defensive purposes; they also provide the GP with opportunities to build future economic value—which effectively enables the LPA’s provisions to function beyond their intended purposes.
Our View: As long-time investors in private equity, we tend to take the view that supporting our GPs will pay dividends. Still, we—like all LPs—have designed our portfolios and liquidity profiles to manage existing investments while still ensuring the targeted long-term exposures are met through new commitments. We believe the allowance of added capital flexibility and time should be decided on a case-by-case basis, influenced by each underlying fund’s performance and the overall capabilities of the GP. As such, we propose that LPs ask the following questions as they evaluate existing managers:
- Does the GP still believe in the value of the assets?
- Is the GP the right manager for the issues at hand?
- Is the alignment and motivation of the GP in sync with the LPAC and other LPs?