Building Your Document Library for LPs

A common misstep we see when sponsors are coming to market is that they launch before they have all their necessary documents ready. The time to collect and organize these materials is during your pre-marketing process with existing LPs. Pre-marketing allows you to solicit feedback from your inner circle with respect to terms, positioning and fundraising goals/timing. Once a fund is launched, all documents need to be finalized and available to interested parties. This preparation is critical to complete the quick turnarounds expected by LPs and ensures that you maintain an unbroken focus through the commitment process. Timing is important, but so is content.

Many sponsors view the marketing materials as an investor presentation, PPM and DDQ with some other basic documents in the data room. Those documents are the basics and, in today’s market, completely insufficient. Fund managers need to develop a comprehensive “Content Library” to properly engage with LPs during the fundraise process. A recent Sixpoint study revealed that on average, a sponsor and their agent will have 26 points of connectivity (onsites, meetings, phone calls and emails) in the process of securing a commitment – 26 per LP that commits! What do all those touchpoints focus on? The answer is content. There will be natural topics to follow-up on, such as exits, new deals, co-investments and general portfolio updates, but there are other diligence items that can also facilitate these discussions including a gap analysis or value creation bridge and lessons learned analysis.

Many of the middle-market PE firms coming back to market share two attributes: they have young, largely unrealized prior portfolios, and they have some underperforming assets that require thoughtful explanation. A comprehensive value creation bridge will often involve over 100 slides of analysis and will effectively walk an LP through each portfolio company’s current valuation and the path to the projected value. By breaking down each step of their plan into digestible details for the LP, sponsors can share the investment team’s vision for the business. LPs will likewise want to understand how your value creation plans for the current portfolio compare with how your team has historically created value (organic/acquisitive growth versus multiple arbitrage) in order to assess the veracity of the information. It’s also crucial to have a thoughtful “lessons learned” analysis prepared in advance of coming to market. The lessons can run the gamut from “sector creep” to explaining the reasons for wide gross-net spreads on fund-level IRRs. In each instance, the LPs are not only looking to see that the issues were identified, but want to know specifically how the fund manager has implemented changes from these learnings and what the impact has been.

Scrambling for any of this information looks unprofessional and will ultimately jeopardize the quality of documentation, so it needs to be done thoughtfully and in advance. In conversations with LPs, they have told us that the timeliness of responses to their requests is a very important consideration in their investment decision making. It provides them with a window into how “buttoned up” the group is and gives them a sense of how they will be treated when they are an investor.

In short, when a sponsor has a complete content library pulled together that supports their fundraising narrative, it helps the LPs understand the virtues of the investment more clearly and to maintain a constant free-flowing dialogue that raises the odds for a successful outcome for all parties.

Next on 60 Seconds with Sixpoint: How to Address LP Bias Against Your Fund

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