A Discussion with Head of Investments Ryan Bailey, of Children’s Health System of Texas: How to grow and communicate with your LPs
Ryan Bailey is the Head of Investments at Children’s Health System of Texas in Dallas. Ryan has over nineteen years of experience in financial analysis and alternative investments, and previously served as Investment Officer/Interim Chief Investment Officer at The Meadows Foundation. His extensive experience in institutional investing gives him a unique and informed LP perspective.
Sixpoint Partners’ Founder Eric Zoller recently sat with Ryan to hear his thoughts on how GPs can grow and communicate with their LPs.
Eric Zoller: Today’s fundraising environment can be competitive for certain GPs, so in your mind, when is the right time for a GP to launch their next fund?
Ryan Bailey: The time to launch your next fund should not always be based on the percentage of capital invested, but rather on the strength of the opportunity set and maturity of the portfolio. Oftentimes, GPs don’t show enough portfolio development before returning to the market. GPs should focus on whether their current fund is performing to expectations or better; that being said, I would caution GPs against doing a big markup before going to market with their successor fund. Also, providing some kind of liquidity to LPs prior to a new launch is strongly preferred and, in many cases, almost a requirement.
EZ: When a GP is thinking about coming back to market how should they think about communicating that fundraising plan to LPs?
RB: It’s important to let your investors know when you plan to finish making investments in the current fund and then give LPs as much as 12 months’ notice if possible. When it comes to your fundraising plan, LPs and cornerstone investors want to hear this story directly, either by phone call or in person. It is fine to announce your plans at the annual general meeting (AGM), but your LPs should have heard the news before and not for the first time at the AGM. Direct communication is key.
EZ: What are the differences in the process and materials that you require when analyzing a new GP versus an existing relationship?
RB: GPs should not be insulted if an LP wants to re-underwrite the fund as if it were a brand new relationship, because in many cases that is simply part of the LP’s investment process. Existing LPs will want to review the updated performance of each investment in order to understand why it did or did not meet initial expectations and may want to talk to other existing LPs in the fund to hear their perspective. An existing LP’s investment program/personnel may have changed since the last investment, so making assumptions about what the needs or requirements of the investor is a mistake.
New LPs may want reference checks, not only the ones provided but ones that weren’t. They are going to want to analyze the track record beyond the results and know which senior investment professional has attribution for which deal. LPs are also eager to understand if there have been changes in the fund terms and why they’ve changed, if so. I would also want to understand a GP’s philosophy around leverage, how they add value, how disciplined they were, how they found banking relationships, how they source deals, what their succession plan is, how carry is shared and the evolution of that, who has been part of investment committee and how it has changed.
EZ: Placement agents have obvious advantages to GPs during a fundraise, but how are they helpful to LPs during the due diligence and commitment process?
RB: GPs are misguided in assuming that LPs are intimately familiar with every aspect of their portfolio. I think advisors are great conduits to provide the LP with information that might be awkward to ask the GP for directly. They are also very helpful with getting LPs comfortable around concerns and issues without having to have that frank discussion with the GP. Advisors are uniquely positioned to frame the investment opportunity and explain how they see it fit in the overall market. They can also provide color on other LPs’ activities as well, telling me if other LPs are or are not coming back to a certain fund.
EZ: From the LP’s perspective, why is having an IR program and a consistent communication effort, so valuable in attracting capital to a fund opportunity?
RB: I look at IR as a way to keep LPs updated beyond the annual meeting. It gives GPs and LPs a chance to talk about the investments, what’s working and what’s not, the pipeline and how the team is spending its time. IR needs to be a focused job; I often find that IR helps with the fundraising effort, and then once LPs are in, it becomes a secondary focus. It needs to be constant to keep investors updated. Understanding what is going on with all your LPs enables you to understand and anticipate their concerns and questions.
Succinct update emails and conference calls when there is information to share works well. Communication at the annual meeting also works, although these events can sometimes be political. There may be tough questions that you don’t want to ask and surprise the GP in front of a big audience. This is where IR can slot in to help answer these questions. Generally, GPs should talk to LPs beyond quarterly. So when there’s news, LPs want the call. If there’s no news, email is sufficient.
Next on 60 Seconds with Sixpoint: Managing and Cultivating Relationships with Consultants