Overseas LPs Ramp Up Pressure on GPs Amid Sluggish Returns
Management Fees Drop from 2% to 1.6%… Demand for Co-Investments Rises
Double Burden: Declining Commitments and Scarcity of Attractive Deals
There is analysis suggesting that overseas private equity fund (PEF) managers are facing increasing influence and pressure from fund limited partners (LPs), as the pace of investment recovery has failed to reach previous levels. General partners (GPs) are now being asked to increase their own capital commitments and are frequently required to participate in co-investments that do not generate management fees.
According to Bloomberg on the 28th (local time), Japan-based financial group ORIX stated in a recently published report that such a “shift in power” is occurring, with GPs reluctantly lowering management fees to retain LPs. The company explained that this is due to the historically slow pace at which capital is being returned to LPs. The report notes that the capital distribution ratio across the industry last year fell to 6% relative to assets under management (AUM). This is less than half of the 10-year average of 14%. The report highlighted, “From the LPs’ perspective, the longer large-scale recoveries are delayed, the greater the gap between expectations and reality.” ORIX not only manages private equity funds directly, but also provides acquisition financing, such as leveraged buyouts (LBOs), used by PEFs. As a result, the company has been able to closely analyze the trend of buyout funds holding onto their investment assets for longer periods.
While LPs are effectively locked in as they wait for capital to be returned, GPs have been injecting a larger share of their own funds into new funds. According to ORIX’s analysis, whereas in the past GPs would typically invest 1–2% of the total fund as their own capital, this figure has now nearly doubled on average.
Fund managers are also being forced to accept lower fees. The report states that the average management fee for buyout funds fell to 1.6% in the middle of last year. This is not only below the traditional 2% level but also the lowest since ORIX began tracking the data. Furthermore, LPs are now demanding co-investments in which GPs cannot collect management fees. Co-investment refers to a structure where LPs add additional capital to portfolios already selected by their existing GPs. Because there are no deal-sourcing or management costs involved, management fees are either significantly lower or nonexistent compared to other alternative investments. ORIX explains that such requirements have now become a “basic expectation for attracting institutional capital.”
The reason GPs are unable to recover investment funds quickly is attributed to the increasing difficulty in raising the value of portfolio companies. According to the ORIX report, GPs who acquire companies are now expected to achieve an EBITDA (earnings before interest, taxes, depreciation, and amortization) growth rate of 10–12% over five years. This stands in sharp contrast to the past decade, when a 5% growth rate was still considered acceptable in the industry.
In South Korea, some LPs are already increasing co-investments and ramping up pressure for capital recovery, with the Military Mutual Aid Association being a prime example. Recently, it announced a plan to allocate 200 billion won to a single management company, but only three firms applied. This is because the co-investment fund operates as a fund-of-funds, imposing strategic restrictions and offering lower fees. Since the investment is made directly into the portfolios of previously selected GPs, the plan is to lower management fees and maximize investment effectiveness.
Other LPs, such as pension funds and mutual aid associations, are also postponing or readjusting investment plans in the first half of the year as funds are moving into the stock market. As stock prices have surged, there has been an uptick in cases where money previously held in mutual aid association products is not being re-deposited after maturity or is being withdrawn early. An investment banking industry insider explained, “The PE industry is facing a double challenge—reduced commitments from LPs and a lack of clear investment opportunities that can easily boost portfolio company values.”
This content was produced with the assistance of AI translation services.
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