Track record and team size and investment capacity continue to be the two most critical areas of due diligence for LPs, cited by 97 percent and 85 percent respectively of the LP Perspectives 2021 Study’s respondents.
“The most important aspects for us are threefold,” says MEAG’s head of private equity and infrastructure, Frank Amberg. “The team and its track record; the fund strategy and co-investment potential; and the fund documentation and alignment of interest. The current crisis emphasises the relevance of each of these.”
Covid has also had an impact on the nature of the due diligence that takes place. A shift to remote working has made it harder for LPs to form judgments on teams at a personal level, which has made data analysis all the more important.
“I don’t think fundraising will ever move away from that element of gut instinct,” says FIRSTavenue partner Tavneet Bakshi. “But in order to compensate for a lack of physical meetings, I do think there’s been a significant shift towards data and transparency. We see that in the types of requests we’re receiving from investors.
“GPs looking to fundraise in this environment need to find ways to be more communicative through information. The more detail you can go into early in the process, using virtual due diligence modules and virtual asset tours, the better.”
The existence or quality of the key-person clause is the leading source of contention for LPs across private markets asset classes, followed by management fees. However, Bakshi believes the situation is less pronounced in infrastructure than in private equity: “There’s always been a natural tension between investors not wanting to pay fees on committed capital and GPs wanting to maintain fees on committed capital. But LPs have generally won that argument.”
Yet, Bakshi explains, the argument is less clear cut when, for example, GPs have a focus on earlier-stage greenfield investing: “For those funds, there’s a significant amount of work early on in the investment that doesn’t necessarily line up with actual capital on the ground, so fees on drawn capital don’t always make sense. We’re now reaching a point of maturity in the asset class, when LPs can differentiate between more passive and hands-on strategies, which will make this issue increasingly less contentious.”
Less aggressive on pricing
“It’s reasonable to assume we’re moving into a phase where the boot will be on the LP’s foot,” says Threadmark’s co-founder Bruce Chapman. “Having said that, I think infrastructure has not been as aggressive in its pricing as private equity.
“Very few funds have been raised with two and 20 structures. There have been adjustments at all levels. Management fees are not that high. Carry, if there is one, is not that high and catch-up terms are already more LP-friendly than for private equity. At the core end of the market, it’s hard to see how fees could get much lower, although there may be some movement at the opportunistic end of the spectrum, especially with larger funds that had held on to fee-pricing levels that were agreed when preceding funds were much smaller. But we’re talking about increments rather than wholesale change.”
“Investors are happy to pay for high-quality products, but you need to offer value for money,” says DIF Capital Partners’ Allard Ruijs. “If you have a track record of delivering returns and sizeable teams working around the globe for you, and charge market standard management fees, there’s no hard pushback.”