New Fund Launches Face Pressure to Commit More Personal Capital

With a fundraising environment that remains challenged, alongside a continued dearth of exits, some limited partners (LPs) may be putting greater pressure on general partners (GPs) to invest more of their personal wealth into their fund—their GP commitment.

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Though reports of GP commitment pressure from LPs are on the rise, senior investment professionals who spoke with Transacted say that this phenomenon is not yet widespread and appears centered on newer funds rather than those with tenured relationships.

“We haven’t seen that pressure,” said Alex Levental, a partner at Ironwood Capital. “It’s kind of investor-specific. Some want to see more investment and may not invest in the fund for that reason, but I don’t think it’s common.”

A partner at L2 Capital agreed with Levental, and both investors noted that they are seeing more pressure on fees than a push for personal commitment. However, Levental said, things are likely different for recent launches.

“We often work with the same investors, so having an established relationship probably keeps them from demanding more investment,” Levental said. “We’re on our fifth fund, and our LPs have continued to grow with us. For first-time fund managers, LPs will likely want them to have more skin in the game because they don’t have a track record.”

Martin Stein, managing director at Blackford Capital, also said his firm has not faced that pressure, but noted its last fund was raised in 2020 and likely will face it in the future.

“We will be,” he said when asked if he expects his firm to increase its commitments in response to LP pressure.

Levental said executives at his firm typically invest 2 percent of total equity per fund, which he described as an industry standard. He added that some larger firms invest more.

“Some of the larger funds have a GP sidecar that they put their capital in.”

Increased commitments can also pose more of a challenge for GPs who are exposed to the same sluggish fund distributions as their LPs. With more personal assets tied up in older funds, finding spare capacity may not be straightforward.

GPs are increasingly turning to debt financing options to meet their funding requirements. Traditional banks and wealth management firms can provide such solutions, as can a number of private credit firms that have recently launched offerings in the space, including Oaktree Capital Management, Ares Management, and 17Capital.

“The question from LPs is how much personal investment do you have,” said William Barret, managing partner at placement advisory firm Reach Capital. “But private equity executives need to be aware that the loans are often not cheap.”

It remains to be seen whether GPs more broadly are ultimately forced to put more skin in the game, but until outlook and sentiment stabilize, continued pressure may be likely, the L2 Capital partner said.

“Until things calm down, that is certainly possible.”

Bob Clair

Bob Clair is a reporter at Transacted covering private equity and investment banking. He has covered breaking M&A news for several years and is a general assignment freelance reporter for The New York Times, where he shared in a 2021 Pulitzer Prize win.