How sticky are LPs?
Just curious. Let’s say the firm in question is a MF with a large fund size (15B+). If their returns are middle of the pack/subpar (so not losing money but high single digit/low double digit IRR), is there a considerable risk of LP attrition? Is it common for LPs to decrease their capital commitments for future funds?
It depends on history and story. If this was the second or third disappointing fund in a row, you should expect some attrition. If this was a one-off the GPs will probably try to spin it as "tough market conditions" (FWIW if this is a 2020-2022 vintage I expect a lot of those funds will be cheeks), or "we tried something new, it didn't work out, we learned our lesson." LPs are smart, and just like with our deals it's tougher to get something through IC if the recent performance has been disappointing. It's all about whether they can believe + sell it's a blip on the radar or not.
More broadly than what you mentioned, LP allocation also depends on macro environment and their liquidity. Even if the fund had done well, there's no guarantee LPs would maintain or increase their commitment if they lost a bunch of money elsewhere or have a lot of positions tied up.
Super helpful, thanks. Was just curious since a lot of sponsors with strong track records are going to have very subpar performances for the vintage years you mentioned. TB for example has an extraordinary track record but will be feeling pain after the 2021 spend spree, so it’ll be interesting to see if they actually hit the 27B hard cap on their 2025 fundraise. It feels like a lot of these MFs are just capital accumulators now, so what happens if they can’t keep accumulating capital in perpetuity?
Specifically on MFs and large allocators it's a bit of a self fulfilling deal. CALPERS has no choice but to only allocate to massive funds in their private program and invest hundreds and hundreds of millions. There's numerous other allocators in this same boat and due to % of fund restrictions and other risk parameters it makes most MFs fairly invincible fundraising wise IMO. The smartest LP allocators do not work at firms like CALPERS and instead work where you can actually be semi thoughtful on scouring the PE/VC universe for truly exceptional managers vs. purely benchmark at best returns (but likely 3rd/4th quartile when looking at MFs, people working there deny it but it's just the honest truth, last 2-3 vintages of all the MFs have largely lagged vs. LMM/MM funds).
Thanks man, really insightful
Keep in mind it’s much harder to create home runs at MFs vs MM / LMM. The check size matters to large LPs. They want someone who can double $1bn in 5-7 years, not 100m
You’re missing the point. CALPERS literally cannot invest in the LMM or even MM because they cannot be more than 10% of a fund (same applies to dozens of other allocators in the hundreds of billions of AUM range). They rarely make commitments below $300mm (and go above a billion at times) due to size thus can’t touch funds under $5b and can only put meaningful $ to work in the MFs. If they had the ability to go down market they would, which is what smaller, more nimble allocators do. Given this, unless the massive allocators just ditch PE the MFs will have a place to raise anchor investments. Where I think they lose market share longer term is in HNW, despite the growth people are wisening up that the MFs don’t produce the best performance and a shiny name doesn’t mean anything for returns. Couple this with the slow bleed of people from wires where that’s the only PE option and this segment will Peter out. In the meantime of course BX will still rape the wire houses for billions (again due to size ML can only do the MFs and take out billions in some instances, see BX SP IX, via feeders).
Agree with the overallocation component but change is happening with American LPs doing co-investments with smaller funds due to SWFs competitiveness. End of this article - https://archive.ph/rYaEe.
Rerum reiciendis dignissimos error omnis. Reiciendis illum ipsa perspiciatis quia. Laborum illum natus et cumque optio doloremque. Et est ab voluptatibus tempore quis. Architecto aliquid consequatur qui voluptas ratione eveniet rerum. Est qui omnis nesciunt rerum deleniti rem cupiditate aut. Ipsum cupiditate eum excepturi veritatis sed quidem qui.
Quasi ipsum dolor omnis qui. Quo eligendi velit atque ea. Ut facilis temporibus consequuntur dolores maxime.
Repudiandae dolorem eligendi vero iure tempore occaecati optio. Ea ad dignissimos officiis et ducimus aperiam. Quia ad et eligendi autem explicabo et. Et tempore eaque iusto et magni perspiciatis qui. Ea tenetur quia in et quia similique.
Et et alias sed quis enim. Atque et nihil sed quis. Pariatur enim corrupti dolorem deleniti. Esse et omnis laboriosam mollitia quaerat animi in natus. Voluptatibus ea facilis dolorem incidunt quidem.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...