By Anne Anquillare, PEF Services

Duane Morris put on an excellent event recently, entitled “Inside the Mind of the Limited Partner”.

The speakers focused on middle-market buyout funds, but many comments are applicable to all private capital funds.

Now, I know plenty of general partners who would like to know the answer to what is inside investors’ minds, so here are the highlights of the discussions.  Some points are old hat, but some have a new twist.

Institutional limited partners are realizing they don’t need as many general partner relationships as in the past (investing same amount of capital as ’04 and ’05, but in 50% fewer funds.)  Data is better for benchmarking so making decisions on whom to cut easier (BTW – benchmark data is IRR based not on DPI, so timing counts).  GPs shouldn’t start marketing their fund until they have exits to talk about and are ready to start calling capital for a new fund (otherwise you get sidelined and it’s almost impossible to come back onto the field).  Below market terms are a red flag.

Lots of talk about co-investing.  The general consensus seems to be that it is more of a marketing ploy than something that truly adds value for either side.  Also special terms for one investor might dissuade other investors from participating in the fundraising.

Zombie funds – consensus is that while historically limited partners had no real options, now they have two (secondaries and firms specializing is substitute general partnerships.)

On the topic of if you only had one dollar, where would you invest it – It seems that the US middle market buyout is still the winner.

Regarding what limited partners are focusing on during the due diligence phase, the old fashioned “how was value created” is still very important, alongside focus on operational due diligence and the new question – why haven’t you sold XYZ company (which is also a popular question these days from existing investors in funds Also, limited partners are trying to distinguish asset acquirers (focus on fee income) from fund managers (focus on carry).

On the topic of the costs of running a fund, limited partners are not focusing on detailed costs, but they are concerned with increased complexity (not just from regulations), so they are hoping funds standardize to take costs out of system. On the flip side, they do recognize that some limited partners are driving the increase in costs as they become more sophisticated and more demanding in their requirements.

Question is now: do the limited partners want to know what is in the minds of the general partners?