Back to (Fundraising) School
The final days in the month of August are known as the dog days of summer and this rings especially true in the private equity community. These days are often referred to as the doldrums of the fundraising calendar year. GPs will cite that LPs are “out of pocket” or on vacations as a reason for diminished activity and while true, we at Sixpoint have found August to be one of the key months for preparing for the year-end push. It can also be a great time to catch some LPs at their desks with fewer demands on before AGM season begins. If you haven’t been making calls, developing content for investors or generally prioritizing your fundraising efforts, we have some good news: it’s not too late to jump start your efforts for the end of 2016. As you know, in September everybody is back with renewed energy and focus. Year-end pressures are felt by GPs and LPs alike, so the private equity industry tends to kick into a higher gear. The fiscal year for LPs does not always follow the calendar year, but for the vast majority these two are tied, so let’s focus on these groups.
As investors approach the final quarter of their fiscal year, they face the pressures of shrinking allocations, fewer remaining commitments and generally speaking, very tough decisions. So, how does a GP get a leg up on the competition versus other sponsors during this most competitive period? Limited time and a lack of resources are not exclusively LP issues during this year-end push and GPs need to take a hard look at which investors are simply tire-kickers and who are legitimately ready to drive something off the lot. In order to have any degree of certainty around this issue it is important to know where the LP is within their allocation process. Key questions for determining this are: (i) how much capital does the LP have left to deploy in 2016?; (ii) how many commitments will likely make up that final amount?; (iii) is that capital directed exclusively toward your strategy?; and (iv) how many other sponsors are there in diligence with regard to that final allocation? If the LP is willing to share the names of the other funds that they are comparing you to then that’s a big advantage. An objective comparison of your firm’s pros and cons in relation to those other groups will serve you well in future discussions around positioning and with respect to prioritizing your time. We have discussed some of these methods of “force ranking” in the past, but not with respect to this type of effort and the distinction is an important one. The key indicator of interest is LP activity. In light of the time constraints placed on everyone during this final stretch, LPs become increasingly selective in how they use their time and look to accelerate their diligence on the most actionable opportunities. Many sponsors make the mistake of waiting for LPs to make the first move, but this can be a critical mistake. GPs, with the advice of an advisor, should be seeking ways to engage LPs that are legitimate prospects for the fund into a deeper level of dialogue early in the fall. We have spoken many times about developing a robust content library for the purpose of getting LPs off the sideline, and this continues to be one of more effective methods to draw interested investors into advanced discussions. A GP’s content library can consist of a series of analyses (value creation or “gap”, PME, etc.) or more tailored materials that directly address issues that investors have raised over the course of meetings and calls (attribution, strategy shift, volatility, etc.). The content library is often not the sole catalyst in getting a commitment, but rather an effective tool to nudging the conversation further down the path of diligence. These materials help address common questions or “push-back” and allow for the sponsor to tease out some important pieces of information that can make the difference between winning a 2016 commitment and not.
We all know that LPs are fee sensitive, but it’s important to pinpoint where that sensitivity is and how you can address it. Is the LP concerned with management fees, fees on committed vs. invested capital, or hurdle rates? Increasingly, we are seeing LPs, typically larger institutional groups, look for a “fee package” that they can bring to their IC. In other words, they are willing to negotiate something that makes sense for both parties. This can take some time, so gleaning this from conversations early in the fall is critical to making a year-end close. We are also seeing LPs focus on structure and process in ways that may surprise GPs. Voting rights, allocation policies and other “LP controls” can be issues. In short, when LPs warm up to this discussion it is important to understand where their sensitivities lie and a good advisor will advise you on the full scope of options available to you to get the deal done. If an LP says that all of 2016 allocations are spoken for, there may still be a way to structure something that allows you to close on documents or in escrow in 2016 and then not draw capital until 2017.
The bottom line? It is important to listen carefully to what LPs are telling you and keep an open mind about possible options to getting them closed; we’d encourage seeking professional advice to navigate some of these issues where appropriate. The race to the end of the year is on, so best of luck to everyone!
Next on 60 Seconds with Sixpoint: All In The Family: Diversifying your Family Office LP Base