By Andreas Huber, Partner and COO, 3TS Capital Partners
As COO of 3TS Capital Partners, I am among others responsible for investor relations and the day-to-day communication with our limited partners (LPs). Before joining 3TS almost six years ago, I have been an LP for more than 10 years managing the private equity program of a banking group with 25 funds and 10 co-investments. After the bank’s decision to withdraw from non-core activities, the portfolio was sold on the secondary market under my lead, which resulted in five parallel transactions of sub-portfolios and single fund stakes.
Thus, I have been on both sides of the table as LP and general partner (GP). I have been doing fund due diligence before committing, and now going through the process with LPs before they invest. I have been on the receiving end for reports and other documents for investors, and now am preparing them myself for our LPs. I have asked questions to GPs, and now am answering to our LPs. Understanding both angles from own experience is proving extremely valuable in my current role. Over the years, I have learned many things about LP/GP relationship management and 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. Therefore, assessing a GP’s prior track record is one of the key fields of investor due diligence. However, until returns are achieved by value creation translating into exits and distributions, it takes years. During this time, the development is only visible in unrealized valuations, and the main source 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 for the LP/GP relationship. LPs need to run their operations and do their own internal reporting, and they appreciate GPs delivering on time and on quality. Even years after having been an LP myself, I recall which of my prior funds had to be chased to provide reporting in time and how the quality of reports and investor relations activities have 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 that 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 towards its LPs. Their questions, concerns, or other matters of discussion are most of the time landing with the COO and form the base for their own decision making. The COO’s integrity and trustworthiness are thus important factors, and literally the only currency the COO has. Therefore, it is crucial for the COO to treasure these traits and be aware that building integrity and trust takes a long time, while they can be destroyed fast. 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 one of the highest-ranking topics.
In addition, while aiming for returns might imply something different, a private equity fund and the LP/GP relationship is people’s business. Therefore, personal chemistry, likeability and reliability are of utmost importance. For example, I heard from an LP who once declined to commit to a successor of a well performing fund, because they felt 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, and not a sprint!
This is an often-cited quote when it comes to private equity, but 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 do due diligence on a GP with the result to pass the current fund opportunity, but the clear outlook to stay in touch and potentially commit to a successor fund 4-5 years later. It is important for the GP to pay attention to this, to update these investors from time to time 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 which is the normal term of a private equity fund. Often this term is extended by 1-2 years to enable the GP to orderly dispose of the portfolio. Adding the time of screening and due diligence before the commitment is made, there is an at least 12-14 year long relationship between GP and its LPs and potentially it can be a lot longer in case of commitments into 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.
If you want to discuss any of the above or have feedback for us, please reach out to me at firstname.lastname@example.org.