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Three key learnings for successful GP/LP relationships

Andreas Huber first used PEARonline as an LP, then became a client as COO of tech growth capital investor 3TS.  We’re delighted to feature Andreas as a guest contributor to the PEARonline Perspectives page. He talks about the nuances of the LP/GP relationship,  drawing on his experience of both sides of the partnership. Number 1 of his ‘3 Key Learnings’ highlights the importance of timely and accurate investor reporting.  As a valued client of PEARonline we are pleased to be able to make his, and his investors’, lives a little easier.

3 Key Learnings for LP/GP Relationship Management

By Andreas Huber, Partner and COO, 3TS Capital Partners

As COO of 3TS Capital Partners, I’m part of the team managing our LP relationships but prior to joining 3TS almost six years ago, I was an LP for more than 10 years.  In my past role I ran the due diligence process before committing and now find myself providing materials that convince LPs to invest in our funds.  I’ve been on the receiving end for reports and other investor documents, and now prepare them for our own LPs. I have asked GPs questions, and now find myself on the receiving end of the same questions. The insights gained from my time as an LP have proved extremely valuable in my current role so when it comes to LP/GP relationship management here are my ‘3 Key Learnings’.

It’s about returns, but…

There is no doubt that investors commit to private equity funds to generate superior returns compared to other asset classes. Assessing a GP’s prior track record is one of the key fields of investor due diligence, but returns are achieved by value creation, translating into exits and distributions, and it takes years. During this time, the development is only visible in unrealized valuations, and the main sources of communication between the GP and the LPs are quarterly reports, capital account statements, advisory board and investor meeting presentations, as well as update calls.

Quality and transparency of reporting, accuracy of information provided, as well as timeliness, are key success factors in the LP/GP relationship. LPs need to run their operations and do their own internal reporting, and they appreciate GPs delivering on time and of a high quality. Even years after being an LP myself, I can clearly recall which of my prior funds had to be chased to provide reporting on time and how the quality of reports and investor relations activities ranked compared to others. Of course, if a GP delivers outstanding returns, investors might be more lenient when it comes to ‘hygiene factors’ like reporting quality and timeliness. But, by definition, the outstanding returns are only achieved by a small number of GPs. I have heard from LPs who decided to re-invest into funds with only reasonable returns because they know that ‘the house is in order’ and by continuing to invest they add an efficient low-risk asset to their portfolio.

The COO’s currency: Integrity, likeability, and trust

The COO is the day-to-day face of the GP for its LPs. Questions, concerns, or other discussions points tend to be directed to the COO and form the base for the LP’s own decision-making processes. The COO’s integrity and trustworthiness are incredibly important factors. It is crucial for the COO to be mindful that, while building integrity and trust is a long process, it can be destroyed incredibly quickly.  I recall a large asset manager presenting their survey results about the LP/GP relationships at a conference once, and not surprisingly ‘likeability’ and ‘trust’ were the highest-ranking qualities required.

In addition, while aiming for returns might imply something different, a private equity fund and the LP/GP relationship is about people. Therefore, personal chemistry, likeability and reliability are of the utmost importance. I know of an LP who declined to commit to the successor of a well performing fund because they felt they were not being treated properly, and trust was not up to their expectations. The decision not to commit was finally made after the GP missed an agreed update meeting and then only sent a junior person.

It’s a marathon, not a sprint

This is an often-cited quote when it comes to private equity, and there is no better way of describing the LP/GP relationship. It often starts years before an investment, as investors want to get to know GPs and observe their developments before they commit to a fund. Sometimes LPs carry out due diligence on a GP passing on the initial fund opportunity, but with a clear message to stay in touch and potentially commit to a subsequent fund four or five years later. It is important for the GP to pay attention to this, to update these investors from time to time, to manage and nurture these relationships and build trust over the years to enable future investments.

Once an investor commits to a fund, the relationship lasts for at least 10 years, the normal term of a private equity fund. Often this term is extended by 1-2 years to enable the GP to dispose of the portfolio in an orderly fashion. Adding the time of screening and due diligence before the commitment is made, there is something in the region of a 12-14 year relationship between a GP and its LPs and potentially a lot longer if the LP invests in successor funds. I am a half-marathon runner myself, and I know what it means to run for endurance and long distance, instead of focusing on sprinting and missing on delivering the long-term goals.

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