1. The longevity of the firm and how the firm's team has worked together. LPs do not like a revolving door at the PE firm and want to know that they have worked together consistently and cohesively for many years; even if with a new fund, often the principals will have worked with each other at a prior fund and had success.
  2. LPs dissect how acquisitions are made – meaning that they do not want to hear that a PE firm purchased six different platform companies in frenzied large auctions (unless they had a great angle on the industry). LPs want to see that PE firms have a business development partner – pretty much full time – and that the firm uses buyside investment bankers, uses senior operators who are well networked into a certain industry, frequent smaller investment banks that are focused in the PE firm's industries and perhaps partner with a CEO who will have a great network and bring opportunities to the table as long as he or she has a sound thesis. So, LPs don't want their firms just competing in what now are frenzied auctions.
  3. LPs, of course, want to see the track record of the fund, and with that, they want to see if the fund built value and had a good exit, and how they built the value of the portfolio company. More and more, LPs expect to see a graphic "bridge" as to how EBITDA value was built with a careful explanation. They don't necessarily get excited if an "outlier" came along and paid three times more of EBITDA than anyone would have expected. They really want to see a methodical build. Also, cash on cash returns are critical as to the track record of the fund.
  4. LPs are very concerned with how PE firms value their existing portfolio companies and examine that very closely. They also are very much proponents of more and more communication with the LPs because in the "good old days" maybe a PE firm would communicate two to three times a year with the LP as to acquisitions, dispositions and activity; but now many LPs are expecting to have communication on a monthly basis if not even more frequent. This, of course, consumes a lot of time for the PE firm, but it is critical. Analogous to compliance regulations that have blossomed in the past few years and the compliance aspect of any PE firm is critical.
  5. LPs seem to have the upper hand in managing PE firm fees – the 2% asset management fee and the 20% carry is still fairly usual unless an LP puts in a very large capital commitment and expects to have the 2% fee reduced – now, of course, this has to be disclosed to other LPs and that can be an issue. Also, other than portfolio company management fees, LPs feel that all transaction fees, refinancing fees, and disposition fees that the typical PE firm would charge to the LPs should now be offset against the 2% fee so PE firms are not having the cash flow per year as was in many prior years. Of course, the LPs also want to participate in co-investment opportunities where the equity need surpasses the capital call; co-investments are very much in demand as LPs do not pay the 2% asset management fee or the 20% carry on many of these co-investments. Now, to be sure the co-investment opportunities may be limited to larger investments from LPs, but it has become in the normal course with PE firms; thus taking away more fees and more carry.

So, the LPs have the upper hand in examining PE firms today -- radically changed from ten years ago. And the fact that smaller PE firms who are limited on their fees that they can take, perhaps less than a 2% asset management fee for the typical five years, has made smaller firms more challenged by trying to keep their top principals in a salaried and carry position that is popular. The world of PE firms has dramatically changed.

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