Private fund investment negotiations often result in general partners (GPs) and prospective limited partners (LPs) misunderstanding and talking past one another.
However, it doesn’t need to be this way. In the recent Akin Gump podcast “Fund Negotiations—Bridging the GP/LP Gap,” funds lawyers Jim Deeken and Gechi Tesic engaged in a mock negotiation between a private equity fund sponsor and a pension fund prospective investor that highlighted some of the common stumbling blocks encountered on both sides of the negotiating table, fleshed out each party’s interests and showed how parties to these sort of negotiations can, as Jim puts it, “get to ‘yes’.”
In this special feature, they sit down to expand on this topic, talk through the advice they would give to help ensure a smooth transaction and explain why they chose the podcast format to share this information.
Q: What do you think somebody who has been in the field, has been in negotiations, could get out of listening to this podcast?
Jim Deeken: First, I think that they could learn how to get to “yes”—how to resolve a conflict without alienating the other side by finding and framing a solution that allows their counterparty to feel like they are getting what they want, too.
Second, a listener could learn that being a good negotiator really requires you to be a good listener: You have to identify what the other person’s issue is and determine whether there’s a way to address it, a way to craft a solution that’s not so burdensome to you but successfully addresses their request. And the only way to do that is if you listen carefully to what they’re saying, ask them what their underlying rationale or underlying concern is, and probe to understand their real issue.
Q: Some of the things that the two of you say in this mock negotiation after the other person has presented their position are “I hear you” and “I appreciate that.” So, there’s definitely a sense that you each put yourself in the other person’s shoes. In that vein, what, to you, is the importance of compromise in “getting to ‘yes’”?
Jim Deeken: I think it’s incredibly important. I always tell young lawyers, focus on enlarging the size of the pie instead of just figuring out how to divide it. If you focus on enlarging the size of the pie, you have more chips to play with and more tools to use to get to a mutually beneficial solution.
Once, when I was a young lawyer negotiating a point, a lawyer across the table suggested something that would be beneficial to us and our objectives, but that wasn’t necessarily beneficial for them. I ran down the hall to a partner’s office because I couldn’t figure out why he did that, and the partner explained, “Well, he’s a good lawyer, and he’s trying to give a low-cost benefit to your client, now, in hopes that you’ll provide a benefit to his client, later.”
Another big element of this is: You have to set a tone of trust. A lot of what makes good negotiators successful is psychology. If you negotiate harshly with the other side, they’re going to be a lot more paranoid about compromising with you because they’re going to think that you’re out to get them.
Whereas, if you say from the get-go that you understand where they’re coming from, and you’re trying to be helpful to them, they’re going to be more trusting of you and more willing to enter into a compromise. And they’re going to do that without overthinking it—it’s all subconscious.
Gechi Tesic: I agree, and to add to Jim’s point, I think one of the things that is unique about fund negotiations is that the parties either have an ongoing relationship or want to have an ongoing relationship. As a result, compromise is particularly important, as is being kind to the other side. It’s very different than a one-off M&A transaction or litigation, where the parties’ interests really are at odds. In a GP-LP relationship, when one wins, the idea is that everybody wins. I think that that colors the dynamic.
Jim Deeken: Picking up on what Gechi said, the other thing that’s unique about fund negotiations is that, it’s not really ever a bilateral negotiation. For instance, in an M&A transaction, you have a buyer and seller who are negotiating against each other, and it’s just those two parties. In a fund negotiation, the fund manager is negotiating against multiple parties (all of its prospective LPs) so it’s more of a multilateral negotiation, which adds significant complexity.
For instance, one of the things we tried to do in our mock negotiation was highlight how, if the private equity fund manager gave the pension fund certain accommodations, those accommodations would impact negotiations with other investors. So, in a way, it’s another layer of nuance for the GP because what it agrees to with one investor ripples through its parallel negotiations with other investors and impacts those as well.
Q: You performed the mock negotiation in front of a live audience and, now, in podcast form. What advantage do you think there is to the podcast form as opposed to a live presentation?
Jim Deeken: Here’s the interesting thing: I think there are two problems with live presentations that make it really difficult to disseminate helpful information. The first and most obvious one is that potential attendees have to physically be in the room, so the presentation has to have been scheduled at a convenient time and place for them—a huge barrier in today’s world.
The second problem is that, a lot of times when people manage to attend live presentations, half of them aren’t paying attention because something came up—they’re trying to work on their phone, or they’re distracted with something else.
The great thing about podcasts is that the listener can listen from wherever they are, whenever they want: when there’s downtime, when they’re driving, when they’re working out or running errands, and their ears are free.
I was surprised at how many people emailed me saying, “I listened to this on the way in from work today,” “I’m going to look into this at the gym,” or “I listened to this while I was doing something.”
I think the podcast not only allowed us to reach a wider audience, but the format also made it easier for our audience to digest the information we wanted to share.
Gechi Tesic: I also think that we got the benefit of reaching an audience that included less specialized listeners in addition to industry insiders by offering our presentation by podcast. For someone to opt in to devoting the time to attend a live presentation on GP-LP negotiations, I think they have to be interested in the subject and feel confident about their understanding of it.
After we went live, we were pleasantly surprised to hear from a lot of people outside of the funds industry who’d seen the podcast, listened to it and learned a lot about both funds and negotiations.
Q: What makes the topic, GP-LP negotiations, and the information you wanted to share, compelling?
Jim Deeken: The issues we address are common issues in fund negotiations, but the inability to solve them efficiently impedes deals getting done and makes negotiations longer, more expensive and harder than they need to be. That’s why this is useful.
Q: What made you come up with the format of a mock negotiation for the initial live presentation as opposed to, for example, a PowerPoint presentation?
Gechi Tesic: Often presenters on this topic either showcase and champion the viewpoint of the GP or the perspective of the LP, so we thought that presenting both standpoints interacting in the same forum would be valuable and stand apart.
A lot of times when lawyers are negotiating these terms on behalf of their clients, I think what’s missing is the contextual backdrop and an understanding of the “big picture” that gets to the heart of the interests on each side of the table. Our hope was that our presentation would provide some color.
Q: Why did you choose these particular characters to play?
Jim Deeken: Institutional investors drive the terms of GP-LP negotiations typically, and pension fund investors represent a large portion of that base, so we thought a pension fund investor’s viewpoint would resonate with, and be relevant to, a wide audience.
With respect to our choice of a private equity sponsor, we chose such a fund because there tends to be more investor-by-investor negotiation within the private equity closed-end funds context than, for instance, with hedge funds and other open-ended products.
Q: You cover several different topics in the course of the podcast as well as some possible sticking points in a negotiation, such as management fees, side letters, etc. How did you arrive at the particular points you wanted to spotlight as being possible bumps in the road?
Jim Deeken: We picked topics that are common stumbling blocks; ones that present what we think are some of the latest trends in how managers are trying to achieve their objectives and investors’ reactions to those approaches.
We tried to avoid the routine stuff such as “What is the right percentage for the management fee?” and “how much should the carry be?” because those conversations have been well hashed. As a result, we tried to focus on items that are material, nuanced, unique and emerging.
Q: If someone’s thinking “Should I listen to this podcast?” what would you say they’ll be able to take away from the podcast that will be of benefit to them?
Gechi Tesic: I think our conversation is a good introduction for anyone who is not well-versed in funds and wants get more of a sense of the flavor of the negotiation process and the different interests at stake.
And more generally, it’s also a great opportunity to observe the successful negotiation tactics that help parties in sophisticated transactions, as Jim always says, “get to ‘yes’.”