LPs are not necessarily getting fee breaks on commitments to private equity funds, despite the slowdown in fundraising globally, but they are seeing more co-investment and a greater willingness to compromise on certain governance areas, the AVCJ Private Equity Forum Australia & New Zealand heard.

“The firms we are interested in partnering with, they always have demand, they always have choice regarding the LPs they engage with. We have not seen a particular shift on terms. The area where we have seen a shift is a greater receptiveness to governance and fiduciary, especially around key person clauses,” said Stephen Whatmore, head of private equity at QIC.

He added that QIC, a sovereign wealth fund and investment manager controlled by the Queensland government, targets USD 1 of co-investment for every USD 1 it puts into funds. It is “seeing considerably more than that right now,” with opportunities emerging because extended capital formation processes mean managers cannot act on deals at the top of the pipeline.

Commonwealth Superannuation Corporation (CSC) is also active on the co-investment front, according to Glenn Riley, the group’s head of private markets. He identified a reduced appetite for co-investment from budget-constrained LPs and fewer GPs partnering with peers on deals as contributing factors.

The only real compromise on terms, Riley added, is an alleviation in the process whereby “hard-to-access top-tier VC funds had required stapling across their product suite.” However, there has been a shift in the focus of CSC’s underwriting, with greater emphasis placed on value creation capabilities, capital management – specifically, whether GPs hedged interest rate exposure – and market awareness.

“Did they take advantage of the extremely favorable exit environment in 2021? And on the other side, how much did they invest? Did they deploy a whole fund in a year or a year-and-a-half, as some managers did, or were they more consistent in their pacing?” Riley said.

For MLC Private Equity, which operates one of Australia’s largest retail superannuation funds, areas of additional scrutiny include China exposure in supply chains, bolt-on acquisitions – given concerns that debt-fueled consolidation strategies might not be sustainable in a higher interest rate environment – and what senior-level turnover means for succession planning, especially in Australia.

“We are looking carefully at the alignment of interest of that next layer down under the partners and ensuring they are motivated and won’t spin off after we’ve given them our capital. In addition, GP stakes firms have been entering the market here and trying to take a share of the management company of GPs we’ve been backing for a number of years,” said Rachael Lockyer, a portfolio manager at MLC.

Turnover isn’t so much a function of market conditions as the age of the PE industry in Australia. A lot of founders “are more hands-off but still taking 25% of the economics, so up-and-coming teams or engine rooms of these firms are doing a lot of the work, but the benefits go elsewhere,” Lockyer added.

Concerns about succession reaffirm Whatmore’s emphasis on key-person clauses. However, his preoccupation with whether private equity firms are adequately staffed goes further – to the ability of teams to manage existing portfolios.

“I encourage all LPs to scrutinize the tenure and composition of the teams they are investing in and really scrutinize the workload that exists in current portfolios,” Whatmore said.

“Particularly in the venture market, there is a not insubstantial category of manager that has scaled up with operating partners and recent joiners in the last two to three years, and they have large portfolios that will require a lot of attention and management time over the next three to five years.”