A Limited Partner responded to my article posted on LinkedIn named “As a limited partner I feel uninformed” with some supportive references to the work the Institutional Limited Partner Association (ILPA) has done to structure the relationship between Limited Partners and General Partners.
I have read their referendum and am not against the work of the ILPA, but feel the work of the ILPA so far offers little suggestions as to how to solve the systemic issues within the asset management realm (see “The musical chairs of asset management”).
Yes, I do commend the ILPA for establishing “dining” etiquette, but it does not change the fact that the food being served is subprime. The way we construct financial systems (in violation of the free-market principles we boast about), by economic principle turns the discovery and arbitrage of the underlying asset subprime (sooner or later).
Already in VC 10 levels of bottom-heavy diversification proliferate lies about the real risk deployed in Venture. And the results show it. VC fails to make a dent in the 80% greenfield of technology adoption, nor produce returns for LPs in line with that gap.
So, while there are pragmatic things we can do with LPs to start to eradicate those economic lies (as described in my article), a much more fundamental change to the relationship and structure between GPs and LPs can turn their subprime alignment from subprime to prime.
Transparency is just a (small) part of the economic framework, and even then the kind of transparency is paramount in establishing a different economic outcome of risk.
And below is the original comment from a Limited Partner (in hotel real estate) on LinkedIn (members only) to which the above was my response:
The Institutional Limited Partners Association has established a set of “best practices” that center around three guiding principles:
1) alignment of interests;
2) Governance; and
Logically, if the GP has significant skin in the game by investing along side of the LP there is a higher likelihood they will be more selective in choosing where to deploy capital. The tenets of corporate governance can require a solution for many of the problems Georges discusses. These procedures can mitigate or eliminate conflicts of interest and related party transactions. And finally, if all the cards are on the table, readily seen by all parties, the dialogue becomes real and meaningful. The level of trust goes up and everyone benefits from an open, honest assessment.
I am in the hotel real estate sector and we have adhered to similar principles for years. While not in total agreement with the ILPA, their efforts are to be commended as an attempt to bring some measure of standards to the industry.