FORTUNE — Yesterday I gave a keynote speech to a group of private equity and venture capital CFOs, at a rain-soaked golf club just outside of Boston. Always an interesting group of folks to chat with, given that they are integral to firm operations but (in most cases) not compensated in the same way as their investing colleagues.
My basic message: Now is the time to be creative when it comes to LP/GP alignment.
For starters, I believe both venture capital and private equity matter. A lot. I know certain readers think I have deep-seated animosity toward my beat, but it’s just not so. I criticize because I care. Venture capital is a necessary ingredient of innovation, helping to create the products that indelibly change, and sometimes save, our lives. Private equity may be a bit less noble, but I’ve worked inside of massive publicly-traded companies and have seen how short-term interests often overwhelm long-term common sense. At its best, private equity can make businesses stronger, employees more productive (in a good way), etc.
But most importantly, I care because venture capital and private equity help fund the important work being done by universities and charitable foundations. And because they can help secure the retirements of millions of workers in both the public and private sectors. That’s why I’ve written so much over the years about GP/LP alignment, and the historical lack thereof.
To me, GP/LP alignment currently is stronger than it has been in any other time since I began covering the industry. A big part of that was the prolonged recession, which turned many GPs from tyrants into beggars. But I also think there was a realization that an asset class cannot survive forever with the deck stacked against its own beneficiaries, and that there is plenty of upside to go around.
We have seen management fee structures change, and transaction fee/monitoring agreements become more equitable (even though such fees should simply be eliminated). I’m hoping that the recent Kauffman Foundation study will help convince more GPs to disclose firm economics to limited partners, since it can help predict future friction or team departures. We’ve seen certain firms reevaluate most-favored-nations clauses, wondering if bulk-buying should apply to alternative investments like it does most everywhere else. Or the recent advent of custom managed accounts for larger limited partners.
Most notably, we have Bain Capital’s recent move toward a-la-carte fund structures – offering two options to its Asia Fund investors and (soon) three options to its general buyout fund investors (plus its co-invest sidecar).
That is innovation, and now is the time for more of it. Venture capital and private equity are in the midst of fund shakeouts, where only the best and/or novel are likely to survive.
Back when the super-angels began disrupting early-stage venture capital, Dave McClure publicly wondered why an industry devoted to innovation was so set in its ways. That was vis-à-vis GP relationships with entrepreneurs/portfolio companies, but the same question applies to GP/LP relations.
Should we see more evergreen structures? LP input into partner promotions? Restructured LP advisory boards where small investors get a voice? Or any of the hundreds of things that industry professionals have privately considered over the years, only to mentally discard because 2-and-20 is the accepted industry standard.
If you’re trying to do something new, let me know about it. Same thing if you’re an LP and want something new. As I said, GP/LP alignment has gotten stronger over the years, but perhaps there are ways to make the bonds tighter without strangling either side. Now seems to be the time to do that.
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