3 common friction points between GPs and LPs and how to solve them

A General Partner (GP) and a Limited Partner (LP) work together to find and fund real estate investments, but that doesn’t mean they always see eye to eye on every detail.

Friction points can arise in any partnership as a natural part of a complex and dynamic relationship. Preparing to mitigate them is as essential for the GP as any other aspect of their operation.

Here are the three most common sources of friction in GP and LP relationships.

Misalignment of General Partner and Limited Partner goals

Like any other partnership, real estate partnerships are built on a foundation of shared goals.

Both the GP and the LP have a better chance of maintaining harmony if they are aligned on the goals of the investment.
How can sponsors and investors avoid divergent goals?

First off, each party should be clear about what their own goals are. Everyone wants to be profitable, but that’s rarely the only objective. Issues like risk-taking, risk allocation, the potential need for additional funding, the project’s lifetime, and more are potential for diverging interests.

GP-led (continuation) funds are a concrete example of a fertile ground for potential friction points and conflicts of interest between GPs and LPs.

GP-led have recently surged in popularity in the secondary market. While these investment vehicles generate more profit opportunities, they also create the possibility for problems to arise in relationships that survived from ideation to exit.

A recent survey by Capstone Partners among GPs and LPs shows a clear divergence in priorities:

Insufficient communication between GP and LP

Communication is one of the most important traits LPs seek in GPs.
GPs should make clear, timely communication a focus of the LP relationship from its inception.

Proactive communication over time ensures that GPs and LPs can maintain alignment and work together to accomplish their goals and milestones.

Communications issues are often unintentional and occur when the GP’s communications operations are stretched thin due to insufficient resources or inefficient allocation of resources.

For instance, if a GP communicates with all its investors via phone and email, sends scanned documents and refrains from using a CRM to manage its communications, it will prove cumbersome inefficient and is bound to lead to friction and a sense of frustration with LPs.

For even mid-sized funds, managing investor conversations with different investor classes across multiple portfolios can lead to gaps in communications.

And when you factor in sharing documents like agreements and tax forms, those gaps can have serious adverse consequences.

One way to avoid this inefficient communication is with dedicated team members. But this will still prove costly and ineffective and will probably not solve the problem entirely, especially if the firm scales or there’s a need for urgent and prompt actions.

Another option is to adopt an investment management platform with easy-to-use CRM tailored for real estate GP-LP relationship management and secure document-sharing capabilities. These tools make it easier to communicate with investors at scale while maintaining security and confidentiality.

Lack of transparency

The third friction point between GPs and LPs emerges when the General Partner’s process lacks transparency. While an LP’s primary role in the limited partnership is to provide funding and resources, regular updates on how projects are progressing and investments are performing are crucial in building trust.

So, it’s not only about how often GPs communicate; the information needs to convey transparency with more real-time data, reports, and easy-to-access information such as project timelines and performance metrics.

However, many companies still generate reports in Excel and Powerpoint, which are inefficient at even moderate scale.

Even though GPs are not intentionally opaque, the limitations in the process result in a lack of transparency.

Typically, these manual reporting processes will absorb finite work hours and cause either incomplete or incomprehensible reporting to investors.

GPs can optimize reporting processes with an investor portal and report-generating tools to alleviate this issue.

These tools give investors real-time access to all their investments, financials, and documents, giving LPs a clear picture of key information while reducing the GP workload.

A comprehensive solution for real estate partnerships

With the right tools, GPs and LPs can soothe tensions and move forward on the same page. Real estate professionals designed Agora’s investment management software as an intuitive, customizable solution to accelerate investment operations and build trust with investors.

The comprehensive software includes (among other capabilities) an investor CRM, a documentation center, and an investor portal, all of which can help mitigate frictions between General Partners and Limited Partners.

Modified Date & Time : 23 Feb 2024, 08:00 am

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Author

Jamie Stadtmauer

Jamie Stadtmauer is the Vice President of Business Development at Agora and has over 20 years of experience in commercial real estate investing.

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