LPs and GPs draw battle lines over expenses, transparency as market turmoil impacts sector


Public markets investors have been slamming on the brakes for the past 12 months as macro factors continue to weigh heavy on the global dealmaking and trading environment. But is a different picture appearing in the private markets? Bain & Company has estimated that the private equity industry has just seen its second-best fundraising year in its history, capping a five-year run that has netted $1.8tn in new buyout capital. But despite outward optimism on the private markets side of the divide, PE is having to work hard behind the scenes to keep LPs happy in a turbulent environment. Kerry Potter McCormick, a partner at business law firm Barnes and Thornburg, shared with AltAssets the changes she is seeing in private equity dealmaking and fundraising which show signs of a power struggle within.

Kerry Potter McCormick’s daily work routine from her New York office sees her advising managers of private equity funds, hedge funds, credit funds, real estate funds and funds-of-funds on the full spectrum of issues that can arise during a product’s life cycle. She is involves in negotiating with seed and other early investors in start-up managers, speaks to companies looking for restructuring and gives guidance to those that are winding-down.

But she also represents institutional investors with respect to their investments in the products. And recently, changes have been afoot.

“You know with what is going on in the world and the macro economy, we are seeing a bit more of LP hesitancy, and it is kind of moving more slowly than a year or two ago,” she said. “And because of that, we see that LPs are asking for more things that they were not asking a couple of years ago.”

According to McCormick, expenses, transparency and ESG are the three things that can now make or break a deal for LPs.


One main change McCormick has been seeing lately on fund documents is the distribution of fund expenses and manager expenses.

When the market was thriving in the years prior to the coronavirus pandemic, investors were not too concerned about the expenses of the fund, she said, and managers were able to list some internal manager expenses such as compliance costs into the terms as fund expenses.

However, investors are now looking to bring in more protection for their own interests as they have become more risk adverse.

“We are seeing a little bit more in the market with LPs saying ‘you are trying to make it a fund expense but it’s actually a manager expense’,” McCormick said. “In particular anything that has to do with the internal costs of a manager, for example, compliance costs.

“It makes sense,” she continued. “Because for the past five years, managers will put more expensive expenses down as fund expense. Investors now want the expenses to go back to the managers’ books.”

It is yet to be seen if the LPs or GPs have the upper-hand in this negotiation, however.

“Some GPs are holding back and said that this had been our practices all along and wanted to keep them, but some are giving in to LPs to make sure they get the commitments,” McCormick said. “All of these boils down to the returns, the strategies, what the LPs are looking for and also the ticket sizes and the portion of the commitments in relation to other fundraises by the manager.”

Speaking of economic terms, LPs are now also looking for management fee breaks if they are backing more than one of the manager’s fundraises.

“Who doesn’t like a discount? And LPs are quite focused on this right now,” McCormick said.


Being transparent has not always been at the forefront of private equity firms to do list, but a sea-change in the last decade has made increased openness from firms instrumental to keeping up a good LP-GP relationship. But just how much information is provided and how can also give a glimpse of who truly has the most bargaining power in the market.

McCormick says LPs are very much asking for specific customised reporting at the moment, with some even demanding to see the executed provision documents that managers sent to other LPs, to make sure that they are seeing the accurate terms others are getting.

“Investors are just increasingly comfortable in asking managers to give them specific information that they need in a specific format,” she said.

Of demanding documents being sent to other LPs, she said, “We haven’t seen this in the market for the past 15 years. This also shows us a glimpse of who is getting more power in the market. I know managers are really resisting it because they really do not want to give away absolutely everything.”

The trend also puts a lot of pressure on managers, as it takes more manpower to take care of the LPs, especially as new regulations take hold across the industry. McCormick said there is a concern that the managers’ burden might get too high, and a trend of consolidation would happen among smaller firms.


As LPs are getting more sophisticated on the subject of ESG, they are generally looking for more oversight instead of just letting managers take their stance.

“Investors are looking for exclusive rights now,” she said. “They are asking more upfront in terms of wanting to know if the managers are going make investments in certain areas. They are also asking for an opt out right and to be excluded from the investments that do not gel with their own internal ESG goals or policies.”

While it is too early to say if LPs or GPs truly have the upper hand in the current market, it is clear that new battle lines are being drawn.

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