60 Seconds with Sixpoint: Don’t Give Up: Fight for that Q4 LP Commitment
It is no secret that GPs are returning to market faster than ever before. This new industry normal is characterized by high velocity fundraising, aggressive pre-marketing, and the deployment of new and innovative tactics to secure LP commitments at the first or final close. To an industry outsider, it seems as though funds are raising themselves. Overall capital allocations remain high and LP demand is strong and growing. So, if all but the top decile funds are taking longer to fundraise, why are even these elite groups struggling to select and more perfectly curate their LP base in their next fund? The answer lies in the fact that while the overall market is growing, the number of managers receiving capital commitments from new LPs is shrinking. An increasing amount of money is going to adjacent strategies, larger fund sizes and re-ups generally. One LP recently shared that he had 12 re-ups to complete with only 1-2 slots open for new managers. This traffic jam of LP capital flows is made worse by (1) GPs coming back to market early and (2) GPs who previously pulled or delayed their fundraising processes now returning back to market having demonstrated liquidity, new deals and/or LP support.
The constant refrain from LPs who say that they are out of money or fully allocated until next year can be deafening. But don’t be alarmed, there is time and value to making an extra hard push in Q4 2019. Here’s how:
1. Remember that LPs themselves are going head-to-head for allocation with certain GPs they may have been tracking. So, while an LP may have come to the dance with one GP, they may end up going home with a different one. Which may be you!
2. KYLP “know your LP”: Identify which LPs may require that last incentive such as a co-invest, secondary or fee discount and be proactive with the offer. Some LPs may never ask, but if you propose a fee break that is specifically tied to their closing by year end, that could help you move up the ladder quickly. I’ve seen 10bps breaks work and 50bps breaks work. It depends on what you want to achieve and where your fundraise process stands.
3. Don’t expect potential LPs to follow up with you around activity or material information. It’s your job and that of your agent/advisor to develop a year-end plan around specific leads with meaningful content such as fund gap analyses, exit teasers and data-room updates.
4. When all else fails, don’t be afraid to get an extension. There is no stigma to a short extension that can be limited to specific LPs or the number of them.
5. Push your LPs to do all their work and even hold their on-site in 2019 and collect the hard circle. Then allow more time for a technical close in H1 2020.
6. Perhaps most important: set a closing date of Dec 31 or Jan 31 (then revert to item #5). Too often GPs are simply afraid to set the closing date and force the fill/kill discussion.
The winners and losers of this fundraising season will be determined based on who is willing to utilize their resources intelligently. It is important to remember that the market environment has never been more competitive. There is no one-size-fits-all list of fundraising solutions; however, a fund’s path to its target is never coincidental. Be proactive both in your approach and the advice you seek.
Sixpoint Partners is a leading global advisory firm focused on a diversified set of services and solutions for the middle-market private equity industry. The firm’s core area of focus include (i) primary fund placement, (ii) secondaries advisory, and (iii) co-investment placement cross a wide range of industries, strategies, and geographies. Sixpoint is headquartered in New York with offices in Chicago, San Francisco, Austin and London.