Help your LP help you

IBM’s head of capital allocation, Peter Hermannsberger, has discussed how the divergence of regulatory and economic perspectives on capital allocation is changing LPs’ expectations towards their GPs.

The discussion was part of a presentation at the Alternative Investment Conference hosted by the Bundesverband für alternative Investments in Frankfurt, which took place at the end of April.

Across client services, investment product design and communication of information, Hermannsberger highlighted what LPs are looking for from their GPs.

From an economic perspective, IBM takes an approach of portfolio optimisation to the firm’s capital allocations. However, from a regulatory perspective, allocation needs to happen in silos. According to Hermannsberger, alternative investments often clash with the strict criteria according to which the firm can allocate its funds.

A broader and more refined product offering, a low interest rate environment and increasing diversification of asset allocations have contributed to this divergence.

For LPs, this has resulted in the need for additional structures to facilitate investments and increasingly tailoring their activities. In turn, higher burdens are put on their resources and expertise, increasing costs and posing questions about how much of the ROI effectively lands with LPs.

Against this backdrop, LPs’ view of GPs is changing. While focus remains on the best possible value proposition, Hermannsberger highlighted additional changes on the product and client services level that LPs want from their GPs.

In relation to the investment product, there is a need for:

• Solving portfolio issues and increased customisation
• A broader offering of various investment structures to decrease regulatory and economic hurdles
• Testing of evergreen structures to reduce the burden on LPs.

On the investor relations side, Hermannsberger stressed:

• An appreciation for the regulatory environments LPs operate in
• Business development through recognition of the changing factors for capital allocation from LPs
• Increasing the dialogue with LPs and assisting them with building up the internal resources to manage the specific capital allocation.

Particular pain points for LPs were a lack of transparency around costs, performance analytics, and holistic and flexible reporting.

Hermannsberger’s presentation suggests GPs that can provide increasingly flexible investment products that will fit easier into LPs’ portfolios, and go beyond the provision of stable returns into collaborating on how to navigate the regulatory and macroeconomic environment, are likely to carve out a competitive advantage for themselves.

By addressing LPs’ needs around client services, communication and product offering, GPs should be able to present themselves as attentive business partners and increase their chances of current and future capital allocations.