Alignment between Limited and General Partners: Group Discussion.

Alignment between Limited and General Partners: Group Discussion.

Dear all,

A friend called me to ask if I could not replace him as a chairman for the group discussion on "Alignment" at the 2022 SuperInvestor Amsterdam event. We were going anyway and always happy to oblige so here we were. It was perhaps the last event of a three day conference, so it could have been very much a graveyard session. However, the twenty or so of us remaining standing had a pretty good conversation on the merits of alignment.

First of all, what is alignment? In a way, alignment is pretty much baked into most private equity structures. Limited Partners, aka LP's or "fund investors" want great returns, preferably with great ESG (clean and green) criteria. General Partners, aka GP's or the "investors into companies" normally want the same thing as a large part of their renumeration comes from outperformance, while being subjected to strict ESG rules.

Top Tier Access is a fund of funds, so in that sense, we are a hybrid. We have both investors (mainly Belgian entrepreneurs & PE professionals) and investees (the funds we invest in. So in that sense, we hope to see alignment from both sides.

What did the panel say?

Well, first of all, and mainly my opening comment is that "bastards can and will be bastards, regardless of any contract." While legal documents are important and crucial, culture will eat contracts for breakfast. It is a softer version of Tucker's law but I think it upholds.

The main consequence of this is that alignment starts with selection. Here are some of the elements the group does select PE managers on:

1. Picking up the pieces when things do not go to plan. This is not just about changing the CEO when budgets are being missed, this is about personally stepping or finding the right people to balance it out, hence operational know-how.
2. Not losing money. Even when clawing it back is the hard way, it is the right way and it shows total alignment.
3. Dedicated transparancy. Sometimes the news is not good. Telling it upfront and early is so much better than having to confess afterwards.
4. Putting their money where their mouth is at. This is always a good thing, even if we know some GP's who have massive skin in the game but are not transparant. Transparancy did trump "skin in the game" at the end of the discussion.
5. Further grumbles about fund managers growing too quickly in size, having too many strategies, being listed on stock markets, doing NAV financing, engaging in excessive leverage... It is a mixed bag, with many arguments pro and quo. But in the end, everybody agreed we would rather be with a coherent team with the right culture than with a band of mercenaries, bringing us back to the selection pont.

One of the points we brought about is what alignment the LP's need to show to the GP's. After all, we are privy to a lot of confidential information but we can also act as a gateway and introducer into our respective networks. Alignment after all goes both ways.

In a nutshell, it was a pleasure to chair this conversation.

Best regards,

Sam Desimpel

Top Tier Access