June 22, 2022

Private Equity: Investors Want More “Skin in the Game” From GPs

Private equity sponsors looking to fundraise from new investors should expect to dig a little deeper into their own pockets – at least that’s one of the implications of this recent Institutional Investor article, which says that investors want to see general partners in PE funds have more skin in the game:

For a lot of private equity investors, the best protection against losses is to make sure their general partners have enough invested in their own funds so that GPs won’t emerge unscathed from negative returns.

The average GP commitment reached 4.8 percent in 2021, according to the latest GP trends survey from Investec. That’s already double the typical expectation of 1 to 2 percent. But according to Thomas Liaudet, partner at the private markets advisory firm Campbell Lutyens, limited partners are even expecting more commitment from GPs as the private equity industry navigates slowing economic activity and a lack of good investment targets.

“There is an increasing demand from the LPs to see a material GP commitment,” Liaudet told Institutional Investor in an interview. He added that the more senior GPs who oversee the capital teams at private equity firms are especially expected to invest in their own funds.

Complicating the position of GPs when it comes to this particular “ask” from investors is that the average size of private equity funds has grown substantially in recent years, with the average fund size increasing from $210 million in 2016 to $340 million in 2021.  That’s left some GPs struggling to meet commitment demands, and the article says that those GPs have sometimes turned to outside investors to enable them to fund their commitments.

John Jenkins