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LPs push GPs to put more ‘skin in the game’

A majority of GPs feel there is an expectation from their LPs to commit more personal capital into their own funds, but over a third say they are unable to access the capital to do so, according to a recent study.

General partners feel pressured to invest more of their personal capital in their firms’ next private equity funds, according to a recent study conducted by Investec Fund Finance.

The vast majority of UK-based GPs – 81 percent – said there is an expectation from their limited partners that the GPs should have more “skin in the game” in their next funds. The average amount of personal commitments from GPs surveyed was £200,000 (€239,000; $316,000). Nearly 40 percent plan to commit between £100,000 and £500,000, while 10 percent said they expect to invest between £500,000 and £1 million and another 10 percent plan to commit more than £1 million.

Investec surveyed GPs in the lower and upper ends of the market, but does not attribute the results to a specific size of investor.

“My sense is these are lower to mid-market [GPs] given the average size of £200,000,” head of fund finance at Investec Simon Hamilton told Private Equity International.

While Investec has seen GP commitments of over 10 percent in certain funds, 8 percent of GPs surveyed said they will not be investing any capital in their next fund, and 78 percent said they are either unable or unwilling to invest more than they have in the past.

In the past year, Investec has seen a threefold increase in lending to GPs.

“They’re under pressure to increase their commitment, but how do you fund that?” Hamilton said. “They’re kind of in a personal liquidity drought…and that has been our experience of why people come to us.”

Over a third of GPs surveyed said the main factor preventing them from committing additional capital to their firms’ next funds is that they are unable to access sufficient finance, while 25 percent attributed it to a reluctance to be overexposed to a single investment and 18 percent they have already committed the maximum allowed by their firm.

Investec’s research was conducted using data from 88 UK-based GPs. The firm recently provided debt facilities to Aureos Capital and Clyde Blowers Capital with provisions allowing both firms to invest in their own funds.

An informal survey taken at Private Equity International’s CFOs and COOs Forum in New York last year showed that 35 percent of attendees polled believed GPs would contribute more than 2 percent but less than 5 percent to their own funds going forward.

“Six percent is a very high number for an independent fund and will certainly make LPs sit up and take note,” Bruce Chapman, a London-based placement agent at Threadmark told Private Equity International in a previous interview.

Investec Fund Finance provides financing to private equity funds, usually between £5 million and £75 million at a time, and specialises in areas including growth and acquisition finance, trust and fiduciary services and specialised lending.