Psst! Hey you! Yeah you . . . the GP reading this blog to take a break from portfolio company panic attacks. Here’s a flash: you know those LPs of yours that totally dig the voodoo that you do and rank as your most stalwart supporters? Guess what: chances are that they’ll be on to the next thing (or even the thing after that) by the time your fund reaches the end of its 10 year (plus however-many-extensions) life. In fact, if you gave me 9 to 5 odds I’d bet that they’ll be gone by your next fundraise. Even money says they’re on to the next thing by the fundraise after that.
Whoa, whoa, whoa . . . don’t get me wrong: I’m not trying to stick a thumb in anyone’s eye. I’ve got a ton of respect for every last one of my Limited Partner brethren. People who live in glass houses shouldn’t throw stones or walk around in their skivvies and it wasn’t all that long ago that I left Old Ivy either (from Old Ivy’s perspective, it was probably addition by subtraction!)
It’s just that the velocity of money out there is so high and the velocity of people seems even higher. But it’s not just the bucks that cause people to move around: in some cases it’s taking ownership of a portfolio or starting with a clean slate; in others, it’s finding a better platform; in yet others it’s scratching that entrepreneurial itch; and sometimes, it’s just about better weather. Folks from endowments, foundations, pensions, funds of funds, you name it are on the move. The character of their moves may differ, but lots of people are staying one step ahead of the sheriff. And it’s all good; this is America, Land of Opportunity: God Bless It.
I do remember, though, when I first started thinking about becoming an institutional limited partner. My buddy Seth beguiled me with tales of long-term working relationships that transcended the transactional, yarns of robust institutional memory, stories of principals, not agents. These were stories of people with steady hands on the tiller who understood their GPs thoroughly, intimately, and sometimes worked hand in hand with those GPs to stretch the envelope of investing comfort. (And as you know, I think that there’s a risk premium to be had from the arbitrage of discomfort). The implication was that stable institutions had better results. At the very least, good GP-LP relationships (at the individual level) helped you to avoid a bunch of the time-wasting and aggravation that arises from intramural struggles and constant re-education.
So here we are, not quite a decade later and I see GPs fretting about having had nearly a half-dozen coverage people at some institutions over the past several years. And just the other day, I realized that one of my Advisory Boards (for a solid 2004 fund) has seen seven (!) of its ten institutional investor reps leave their institutions. Will it matter? Dunno.
But with so many moving parts, funky behaviors sometimes follow and that’s what worries me. Occasionally, you see increases in institutional inertia as new LPs take a light touch with “valued relationships” that might otherwise be dead wood. After all, who wants to run the risk of kicking a once-great (or maybe-someday-great) fund out of the portfolio? It’s easier just to re-up. ("Everyone else" is doing it anyhow.) Sometimes, you see the “new sheriff in town effect” where people seek to clean up the portfolios they inherited; sound and fury ensue! Babies get thrown out with bathwater and the last cat gets all the blame while the new cats think they’ve got a clean slate. Somewhere between those two extremes is the right approach, but the former is the path of least resistance while the secondary market keeps growing to help facilitate the latter.
But I fear there’s a casualty in all this: Partnership with a capital P. The best LPs are Partners, while the worst are just money. And with all the musical chairs out there, I do wonder if we LPs are training GPs to treat all of us like temporary placeholders? High-touch relationships marked by consistency and predictability lead to a better interactions while weak relationships are governed by the least common denominator: the legal docs. As an old-time VC once told me, “the minute we have to open the bottom drawer and pull out the fund docs, we’ve all lost.”
I’ve been lucky to see a whole lot of GPs end up doing what’s right, not just what’s allowed. I just fear, though, that as folks continue to bounce around – resulting in more tenuous relationships and more amnesiac institutional memory – that such behavior will become increasingly rare.