The TPA Roadmap for GPs: From Parts Provider to Chief Problem Solver

By John L. Bowman, CFA, Chief Executive Officer, CAIA Association

If our entire pitch book is based on the beauty contest mentality of us vs. them, we will be speaking a foreign language, eventually an offensive one, to the TPA CIO. 

As CAIA Association continues to lead the conversation and thought leadership around Total Portfolio Approach (TPA) over the interwebs and throughout the globe, one paradox has continued to flummox me.   

TPA has evolved from a caricatured exception at a few big plans to a ubiquitous narrative throughout asset owner circles in a few short years, reaching its tipping point with the CalPERS news late last year. We’ve used phrases like new playbook, mousetrap, or institutional framework for allocating and governing capital to describe the profound changes across governance, culture, investment process, incentives, talent, and benchmarks to describe the necessary transformation.   

It's therefore axiomatic that such profound changes at the underlying institutional client would necessitate a complete rewiring of the downstream value chain as well, particularly amongst GPs.   

Strangely, however, it seems to me that GPs have either ignored this completely, remain aloof to the transition, or give it lip service - but don’t embrace some of the radical change required to be successful in a TPA model.   

In our recent Capital Decanted TPA episode, we outlined a three-step roadmap for GPs to adapt from an endowment or strategic asset allocation (SAA) model to a TPA ecosystem.   

The defining ethos of the TPA model is the competition for capital. The competitive set, therefore, for a 2-3% vacancy in the portfolio is no longer just other similar asset class strategies clamoring to occupy their native bucket. Direct lending strategies are competing with public equity, Indian infrastructure, crypto venture capital, and sports club ownership. You’re contending against a full spectrum of good ideas across asset classes and risk premia aiming to maximize the risk/return of the marginal dollar. 

This means you need to understand the whole portfolio, how it is positioned, the tendences and investment thesis of the CIO, and the goals of the fund. The entire organism now needs to be in your sights and mind versus one small sleeve. Most importantly, the historical performance of your strategy against its peer group may now be 3^rd or 4^th on the list of important considerations. Portfolio fit is the most critical factor, which means that you need to be willing to - brace yourself - identify when you are simply not a good match (or have the right timing) for the asset owner. Your goal is to be an extension of the CIO in helping her with the portfolio cohesion story vs. a transactional parts provider. This takes a tremendous amount of self-control, self-awareness and active listening. 

Which leads me to my second and related point. 
 

We overuse the word ‘partner’ but, in this context, it is an accurate portrayal of the goal in contrast to how we think of agents, sub-contractors, and hired hands. 

GPs need to be in the business of providing solutions instead of selling products.  Again, this means you’ll need to devote significant time to getting to know what’s important to the client.   

Instead of myopically pitching a strategy, work hard to excavate what the CIO is worried about and become active in setting them up for success by contributing to mitigating that challenge or risk.  

This will uncomfortably confront our default mechanisms and attitudes towards scale, customization, separately managed accounts, multi-strategy capabilities, flexible mandates etc. May I even say that being in and out of market through a traditional two-three-year fundraising model for new vintages of the same strategy is an anathema to the idea of solutions provider—it’s very parts oriented. 

There will be much fewer GPs needed in a long-term TPA partnership model. CIOs will significantly rationalize their managers, so the successful ones need to trash the pitch decks and learn to operate at a much higher altitude. 

And finally, third. 
 

Words matter; logos (the Greek one, not the pictures) is foundational to our motivations and relationships. How you speak and what you talk about is a reflection of your thoughts and underlying values. 

In a TPA shop, asset classes, benchmarks, relative performance against peer groups, asking about your “PE book” or your “private credit sleeve”, LP/GP alignment and contracts are SAA vocabulary.   

You’ll need to learn a new contextual language to translate what you can provide and how it benefits the whole portfolio. This should not be underestimated. Again, if our entire pitch book is based on the beauty contest mentality of us vs. them, we will be speaking a foreign language, eventually an offensive one, to the TPA CIO. 

And CIO’s will need help with risk assessment, technology solutions, data sets, thought leadership and intelligence that assist them in acutely understanding the overall positioning and exposures of the portfolio. GPs need to think about more holistic value transfer for their fees beyond monetary returns, as the future LP will be asking much more of them in co-creating product, influencing their investment thesis, and enabling a more tech-forward grasp of their portfolio. 

Asset Owners have upgraded their entire cockpit and DNA to ensure investment outcomes are optimized for their beneficiaries. It’s time GPs evolved to meet this moment as well. 

While we have spoken to countless LPs and GPs about the implications of TPA to the profession, we owe a particular debt of gratitude to James Clarke of Blue Owl and Gene Podkaminer of Capital Group for this framework and phraseology.