Private Equity: The Mechanics of Intellectual Capture

By Nanea, a private equity insider

I thought I would make a brief digression into how private equity GP*s are able to use a web platform called IntraLinks as a vehicle to intellectually capture and, in a sense, hold prisoner their LP investors.

Private equity funds generate a lot of written communications from the GP *s to the LPs. Among other things, the GP*s send the LPs various of the following:

• “Capital calls”- notices that money is needed to fund investments;
• “Distribution notices”- information that money is flowing from the fund to investors and why;
• Quarterly fund financial reports- financial statements for the fund;
• Annual fund financial reports- more financial statements for the fund

It’s a lot of paper, trust me.

During the dot-com boom, somebody at a PE firm got the idea to use a nascent web business called “IntraLinks” to send all of these communications to their LPs. The idea quickly caught on among both GP*s and LPs, to the point where it is used almost universally for this purpose today. For the LPs, IntraLinks has supposed benefits: all of their paperwork for each fund is neatly organized for them on the IntraLinks site, and the service is free for them (IntraLinks business model is to have the GPs foot the bill). The idea of all the paperwork organized in one place has especially powerful appeal to the biggest LP investors, the major government pension funds. These pension funds have hundreds of commitments to private equity funds, and, as governments, they tend to lack the financial resources necessary for support staffs to maintain all these records. So it seems like a no-brainer decision to “outsource” the record keeping for free to IntraLinks.

To some extent, IntraLinks has similar appeal to the GP*s. It gives them a means to centralize communications with their investors. All the GP*s have to do is upload a document to IntraLinks, and from there the site takes responsibility for ensuring that the appropriate individuals among the LPs get to see it.

But there are darker powers inherent in IntraLinks too, one that the GP*s have used ruthlessly to their advantage. Most significant of these, IntraLinks allows the GP*s to see in real-time which of their investors have opened a document. As a result, when an LP comes in for a one-on-one meeting with a GP*, the GP can know beforehand whether the LP is aware of the current portfolio company valuations or not. Anyone who has ever been involved in selling can appreciate what an incredible advantage this information provides to the GP*. It allows the GP* to be more aggressive in spinning what euphemistically might be called “narrative” when the GP* knows that the LP hasn’t done his homework and is in no position to call him on it.

An even darker potential that IntraLinks offers is that it permits the GP* to replace unopened documents with new versions, and the LP has no way of knowing.

I am aware that some LPs make a strong effort to continuously siphon off all the documents on IntraLinks in order to maintain copies on their own computers. But I also know that many LPs do not do this. They have effectively handed over the keys to their own filing cabinets to the GPs with whom they do business.


As discussed in an earlier post, GP*s are the natural people who manage the sponsoring private equity firm, as opposed to the general partner (GP), which is a legal entity

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  1. jake chase

    Let’s see: private equity collects public pension fund money and leverages it through bank borrowing to acquire and strip mine productive businesses which are then looted by the PE snatchers and thrown on the bankruptcy scrap heap. What a charming twentieth century business model. What an inventive approach to the use of worker pension monies. It could only be improved by giving these PE snatchers direct access to the Fed. No doubt these guys are working on that.

  2. Bill McCullam

    Dear Yves,
    Never know how to reach you. Thx for all the work, I’m a subscriber.
    Anyhow, copper is not final. It rusts in 20-50 years and especially in the presence of acid water it will go more quickly. If you had one pinhole leak, expect more soon.

  3. Middle Seaman

    Although not an investor in PE, I still get piles of documents from various investments. Most of the documents are junk and not called for. I can find the information I need myself.

    Pension funds, and other LPs, should be smart enough to mask their documents of interest. Obviously downloading everything always will leave the GPs in the dark about the LP’s concerns and intentions. Locally you can get rid of downloaded document or, the reasonable approach with today’s storage costs, keep them all.

  4. Susan the other

    LPs sign on for limited liability. They know they have no say from the get go. If they find fraud can they just get out?
    Also, speaking of fraud, IntraLinks sounds very organized and specific. If this sophisticated software has existed for 10 or 20 years, why is MERS so pathetic? Intentional? Maybe all that’s left for MERS is to pretend to be pathetic.

  5. OMF

    If the LPs aren’t requesting or recieving hard copies of every relevant document, then they have no-one but themselves to blame when they are inevitably fleeced.

    You can keep your social life on the Internet if you want, but if you keep your business there, son’t be surprised when it all disappears in a puff of smoke.

  6. Skeptical

    Wow! I’ve used intralinks for years and never realized how it can be abused that way.

    It kind of reminds me of MERS for institutional investors.

    Thanks for provding this information.

  7. wilber

    Yeah, that’s the reason we “made tracks” through the data room and then relied on our consultants for everything else. Never saw anything sinister in it. Don’t understand any of the references to MERS though.

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