The power principle

“That was a very interesting article,” the general partner (GP) said on the other end of the line, “but let me ask you something: what is the vintage of that fund?”

“Two-thousand and six,” I answer.

“I see. I thought there were some unusual elements in the fee structure, elements which many other funds have ‘cured’ over the past three years. But I wouldn’t call what happened there a new shift in the balance of power,” the GP argued.

The article in question was a recent rumination by Infrastructure Investor on the increasing power limited partners (LPs) are wielding over GPs on everything from fees to fund structures. It concerned the fee renegotiation between International Public Private Partnerships (INPP) and its investment advisor, Amber Infrastructure, which involved substantial cuts for the latter.

In a way, the GP is right: the INPP/Amber renegotiation is more of a ‘correction’. The shift in power that triggered it has, for the most part, pretty much affected every other fund manager in the industry already.

On the other hand, power is still flowing from GPs to LPs and both are still struggling to find their new roles in the post-Crisis world of infrastructure investing.

Take a look at all of the transformations that have occurred in the LP/GP relationship over the last few years, and you can’t help but see the tortuous ways in which power changes hands, twisting and turning like a river adjusting to new shores.

In the beginning, there was the GP, and, it’s fair to say, most of the power resided with it. That was unsurprising, given that infrastructure was barely considered an asset class and most LPs struggled with it – Is it private equity? Is it real estate? What exactly is it?

In that type of environment, knowledge is power. GPs had the teams and the necessary expertise; LPs, with the exception of a few pioneering outfits, had neither. That’s the type of knowledge you pay handsomely for.

Then the 2008 Crisis exploded, with LPs losing billions on investments sourced by third-parties, some of them – albeit a tiny minority – infrastructure-related. The mood among LPs hardened, with many taking a “power corrupts” view of their relationship with GPs.

By then, though, infrastructure investing had been around for a while. Larger houses formed a view that it was better to invest directly in infrastructure and created teams to do it. Even LPs that weren’t large enough to establish their own teams felt that a renegotiation of their relationship with GPs was in order, especially around fees.

Co-investment became de rigueur, sometimes with mixed results, with LPs often not being able to move fast enough, or eventually opting out because they found they would get too exposed to certain assets.

Bespoke arrangements, separate accounts and other managed solutions are on the rise, even if it is once again debatable whether the LPs asking for these structures have large enough teams to make use of the benefits that come with them.

After all, what good is veto power if you don’t really know what you are vetoing, the more cynical will ask?

Balance can tip

But if it’s true that power these days is generally flowing from GPs to LPs, it’s equally true that this shift hasn’t completely solidified just yet. Star turns from GPs and/or a significant number of botched direct investments on the LP side can easily tip the balance. Nothing is set in stone.

As the great abolitionist freedom fighter Frederick Douglass once said: “Power concedes nothing without a demand. It never did and it never will.”

It’s up to both sides to make a strong enough case if they want to hold more of it.