How could we close the gaps in thinking between GPs and LPs, and what should both parties be bringing to the table in order to build that partnership? Andrea Ash, Investment Director at RPMI Railpen, and speaker at SuperInvestor 2020, shares her thoughts.
Like many other investors, I often start meetings trying to understand what the GP is aiming to achieve. I want to know what their philosophy is with regard to their business, their portfolio and their investors. GPs will often want to know what our source of capital is but rarely go beyond that.
If GPs and LPs don’t take the time to try and understand each other, is it, any surprise that gaps exist?
Closing the gap
For many years the gap between LPs and GPs widened across strategies, though arguably over recent years it has started to stabilise, or even improve. That has largely come off the back of industry bodies or bigger investors with more influence. However, LPs are becoming more sophisticated in their approach, and forward-thinking GPs are more open to challenge. Notwithstanding the foregoing, venture investing, with standout performance and smaller deal sizes, has been a victim of its own success – LPs have flocked to it and at an increasing price. The impact of COVID-19 is likely to help reset expectations in certain strategies. Nonetheless, venture has largely held firm and as such is unlikely to leave much room for negotiation.
We need to understand how the GP is viewing us – are we simply a silent provider of capital, or are we a potential partner?
The Private Markets team at Railpen first and foremost want to generate strong risk-adjusted returns for members. We want to invest in the start-up ecosystem as part of that strategy and recognise there is a cost to doing so. Before we accept that cost though, we need to understand how the GP is viewing us – are we simply a silent provider of capital, or are we a potential partner? The former is unlikely to work for us; we believe there are implicit costs to that type of relationship, and in that case, we need to have the strength to walk away.
The latter provides a far stronger foundation upon which both parties can achieve their desired objectives, and with that comes far greater alignment. Many established managers in the space have performed exceptionally well, which, unfortunately, has reduced the incentive to adopt a new approach; this has led us to look for top talent in new ways. Venturing outside of the more prominent names entails more work, but we believe it is far more conducive to meeting our objective. That’s not to say we don’t have extremely valuable partnerships with some very well established names, because we do.
So what do we mean by partnership?
The meaning of partnership can vary widely depending on the situation in hand. More broadly, we all appreciate that venture investing carries significant risk, so we need to understand that risk better. That means greater transparency; we do not want GPs to act as gatekeepers to knowledge. We like to meet Founders, for example. Secondly, we do not simply focus on fund returns in isolation; we want a more holistic approach to investing. We have a broad, complex portfolio spanning investments that on paper might look very different, but indeed can be very complementary. For example, within Private Markets, we have a Financial Services strategy with access to deep sector expertise across the credit, equity and technology space. Earlier this year, we brought that talent together to discuss a broad range of topics, enabling us to have a more 360 view of the sector and to challenge our thinking across the portfolio.
It takes a certain willingness from GPs to engage with investors in this way but, if they are interested in us as partners, they benefit by understanding more about how we are thinking and where we want to take our portfolio. They also get to hear what other experts in their sector are thinking.
Similarly, we have labelled our venture portfolio “Innovation”. It speaks to how we think about the strategy; for us, it much more than simply high risk, high reward investing. Our partners are focusing on tomorrow, which can be invaluable to our broader Private Markets portfolio, and to our wider business, today. We are currently evolving how we access the start-up space, and we want input and challenge from our GPs to do that, even if it potentially changes certain dynamics for them. Of course, it would be remiss not to mention terms. There is much contention around these, but I believe that if you can establish an open and honest relationship first, you have a far better chance of finding an equilibrium. This is not where we start, but we hope by that point, challenge is expected or even welcomed.
Even LPs underestimate what they can bring to the table.
Partnerships work both ways though – if we want managers to help us, we need to be prepared to help them. I believe that even LPs underestimate what they can bring to the table, and GPs have rarely considered asking anything more of their LPs than capital and fees. What we can provide will vary greatly depending on the situation. In the case of a newer manager, for example, we want to support them in building a successful long-term business; here, both parties should be closely aligned. That takes financing though so we think it is short-sighted to try and cut costs here.
Equally, we are very focused on what that means for the longer-term relationship. Again though, we try to find ways of providing more than just capital if we can, but we need the GP to help us in identifying what that is.
The gap is wide, but we believe that with the right people and the right approach, there are many ways to help close it.