What Can a GP Expect From an LP Regarding Risk Management?

Explanation

A GP can expect extensive due diligence on its risk management and processes to be conducted by the LPs. The following points could be assessed:

• Has the GP established a risk management function?
• How is risk management organized at the GP?
• Does the GP have an ESG policy?
• Is the GP’s team structure sustainable and is there a key man risk clause in the LPA?
• Does the LPA contain a limit on concentration risk?
• Are political, regulatory, country, tax risks considered in the LPA?
• Have all conflicts of interests been considered and identified and properly addressed in the LPA?

Furthermore, a Limited Partner should assess and measure its own private equity portfolio risks, which includes:

• Investment risks (e.g. expected return scenarios, FX, alignment, risk/return profile, etc.);
• Funding and liquidity risk;
• Market risk;
• Capital risk.

Recommendation

Management should be open to facilitate the assessments by LPs in an open and constructive manner in the due diligence process and throughout the monitoring of the investments by LPs.