Assessing GPs and the Tough Environment
In an interview, originally published in Buyouts, Amy Jupe, head of private equity primaries for the firm’s External Investing Group, talks about the implications of longer fundraises and why LPs are delaying commitments to GPs.
Amy Jupe is global co-head of private equity primaries and global head of private credit for Goldman Sachs Asset Management’s $400 billion External Investing Group (XIG). The group invests in alternatives and long-only asset managers through funds, secondaries, co-investments and GP stakes. She is responsible for manager selection and portfolio construction for LP investments in private equity and private credit funds.
London-based Jupe spoke to affiliate title Buyouts about how XIG evaluates managers, how it is responding to the current slump in fundraising and exits, and what she’s hearing from GPs.
Can you give an outline of your role and main focus areas?
XIG covers public and private markets, and I sit on the private markets side, which has four strategies: primaries or manager selection, which is my focus; secondaries; co-investment; and GP stakes. We share insights across those teams.
My team is most active in buyout, and particularly in the mid-market, but we also invest in growth equity and venture. We invest globally, allocating the most in the US, but we are also very active in Europe and Asia.
We have local teams in all those core regions, with around 15 senior people focusing on manager selection globally [out of around 400 in the XIG unit globally].
How do you assess funds?
There’s an important top-down element to our process. Every quarter, we come together as an investment team and debate our top-down views of the strategies, regions and sectors we believe are going to represent the greatest opportunities. That top-down thinking guides where we spend our time, but also how we build the portfolios.
We complement that top-down piece with bottom-up work. We spend time analysing many aspects of an individual manager, including spending lots of time with them in person.
Optimism seems to be growing about private market investment for the coming year. But we see some LPs are overweight to PE and moving to shrink their allocations. Does this reflect what you’re seeing?
We hear from GPs and their underlying LPs that parts of the LP universe continue to show good demand, but also that some LPs have unfortunately had to step away from certain fundraises.
In some cases, that’s because they’re overallocated to private equity, but another reason is that some LPs are waiting for more robust distributions across their portfolios before they make re-ups.
But even with that dynamic in the market, some GPs can still do very quick fundraises, including one-and-done closes – more typically the smaller managers with very solid performance.
However, the average length of fundraises has increased quite significantly, and we hear it can be very hard to get LPs to hit deadlines for fund closes.
How are GPs trying to address these issues?
Some GPs will potentially offer an early bird discount or even a size discount. But by and large, there aren’t as many reasons for LPs to move quickly now. Generally, the LPs will now wait for more visibility on the performance of legacy positions.
You’re also seeing more managers offer partially funded portfolios, where they’ll have their first close and second close and make some investments. So, by waiting as an LP, you get to evaluate the initial investments in the fund. So, why not wait?
Is XIG waiting longer to commit to funds these days?
In situations where the fundraise is moving quickly and capacity is more limited, we’re more typically part of the early closes. However, if capacity is less constrained, then it can be to our advantage to wait for a later or final close.
Some LPs are not re-upping to the same degree now, so are GPs having to find other investors?
It’s not new for GPs to try to optimize their LP base by bringing in new investors, especially those that have strong demand and can do quick fundraises.
Some managers will say they could raise new fund with their existing LPs. But even if that’s the case, most GPs we speak to will still selectively bring in a few new LPs for each of the different fundraises. They do that for diversification reasons. They may simply want to increase the number of investors from a small, concentrated group in the first fund. But they also might want to diversify by geography or type of investor.
What’s your take on re-ups now?
We do re-up with some GPs, but we don’t have a 100 percent re-up rate. When we’re making a new re-up commitment, we go through the same very robust investment and operational due diligence process. We do a whole new diligence process for each individual fund because GPs can change over time.
As an LP, are you still seeing a much greater number of incentives than you were three or four years ago, when fundraising was easier?
Not really. For the mid-market buyout managers, you’re certainly not seeing fee compression, and smaller funds typically won’t offer any type of discount, whether it’s an early-bird or size discount. And a lot of those managers [still] don’t offer any type of co-investment rights either.
By and large, managers are trying to get people over the line by having flexibility around the length of the fund raise. Managers are now amenable to spending more time with LPs, ensuring they get access to the people they need to conduct their diligence process.
There’s [also] a focus on realisations. Some LPs are waiting for distributions before they make new commitments. So GPs are very focused on pursuing exits in what is a more challenging environment, and some exits are happening.
How long is a typical fundraising period now?
I would say a year is reasonably standard, and even 12 to 18 months has become reasonably common for many funds. But once you get to 18 to 24 months or beyond, that’s when it starts getting long.
There’s obviously a limit on how much they can extend the fundraising period. What are the implications of doing this?
On one hand, GPs will probably have a fund size that’s required for them to execute their stated investment strategy, and they need to retain and incentivise a team by hitting a certain target.
But fundraising takes a lot of time and focus for a GP’s whole organisation. And once you go beyond the originally stated fundraising period, typically you have to get some type of LP or LPAC [LP Advisory Committee] consent. That’s more work to do.
And an LP who’s committed in the early days of the fundraise may not want to see new investors continually coming in much further down the line. LPs can get more comfortable with that if they think the extra capital is going to improve the ultimate performance or help execute on the stated strategy.
