LPs Are Embracing Direct Investing [Video]
Will that change the GP-LP relationship?
1 November 2018
In partnership with Global Fund Media we recently published the Intralinks 2018 LP Survey, which analyzes findings from our survey of 190 U.S. and European limited partners (LPs). While the report focuses on the LPs’ current and future investment plans, we assembled an expert panel to dive deeper into the impacts of direct investing on LP-GP relationships.
Michael Nitka, managing director and head of the credit investments group at Stifel Investment Bank and investment committee member at CM Investment Partners, Wim De Vlieger, partner at Sidley Austin LLP, moderator James Williams, managing editor of Private Equity Wire and I recently met for Direct to the Deal, a webinar where we discussed the survey results and reflected on current and future market conditions, sector preferences and risks.
The first topic focused on the drivers of recent trends. According to our survey, 60 percent of LPs that are pursuing direct investment and co-investment opportunities said that their primary motivating factor was to increase returns. But we don’t think that’s the only thing motivating them. Direct investing can reduce cost and enhance performance, but it also provides LPs with more control over their investments and enables them to target opportunities that match their risk profiles in sectors and geographical regions of interest.
“There’s the question of opportunity and cost, but one of the main drivers in addition to that is control,” says Wim De Vlieger. “As a silent LP in a commingled fund, they don’t have that much control but as a co-sponsor or sponsor, they do.”
As LPs move toward direct investment opportunities, one of the big questions is: How is that activity impacting the GP community? The answer, in short, is that it’s ratcheting up competition. LPs have plenty of capital on hand to fund direct and co-investments, their timelines are usually longer than GPs’, and cash-rich corporates are jumping into the mix – all increasing the demand side of the market. Consequently, stress fractures might be appearing in key sectors.
In fact, according to our survey results, high prices and limited return potential appear to be causing LPs to back away from core-plus real estate over the next 12 months, which raises concerns that the market is becoming crowded. To deal with the added risk, Wim De Vlieger made the point that “LPs will need to set up a system to source transactions and will need to be ready to take on execution risks on transactions, which is something that – as a passive LP – they won’t be used to in the same way.”
A discussion of market competition raises the issue of how LPs can improve their competitive edge with tools and technologies. For example, securing data management, streamlining due diligence and efficiently managing pipelines with VDRs enables LPs to leverage their relationships and expertise, while a deal sourcing platform can help them uncover new opportunities. The caveat is, however, that technology investments only pay off if you’ve got the talent on board to find the right deals for you. As Michael Nitka succinctly summarized the point, “It comes down to, when you’re doing one of these deals, knowing all of your resources.”
Download the Intralinks 2018 LP Survey Report and watch the webinar recording below to get more insight into sector preferences risk considerations, and the future of direct investing for LPs.
(Above) Watch the entire Direct to the Deal webinar on-demand featuring Michael Nitka of Stifel Investment Bank and CM Investment Partners; Wim De Vlieger of Sidley Austin LLP; moderator James Williams of Private Equity Wire; and Meghan McAlpine of Intralinks.
As Director of Strategy and Product Marketing for Intralinks, Meghan McAlpine is responsible for the go-to-market strategy and driving the growth of the company’s Alternative Investments solution, the leading communication platform for private equity and hedge fund managers and investors.
Prior to joining Intralinks, Meghan worked in the Private Fund Group at Credit Suisse. While at Credit Suisse, she raised capital from institutional and high net worth investors for domestic and international private equity firms.