How to Address LP Bias Against Your Fund

Controlling the narrative around your fundraise and more broadly your brand requires a degree of receptiveness and preparation that sponsors sometimes underestimate. At no point is a fund manager more publicly facing than when they are raising capital, but instead of being vulnerable at this point, the best private equity firms use this time as an opportunity to strengthen their image within the investor community and in some cases recast or change any negative narratives that may have gotten into the market. The most critical element in successfully correcting LPs’ perception of your firm, if there is a negative perception, is having the self-awareness to recognize that there is an image problem or perception issue in the first place. Often fund managers become frustrated with LPs challenging them on elements of their story instead of recognizing that these flaws exist – or even simply acknowledging that the misperception exists – and tackling it head on.

One area of LP pressure that has become more common in the market is around fund managers coming back to market too early. In light of the time typically required to raise capital and the robust fundraising market currently many sponsors have chosen to launch their successor fund earlier than normal. The best way to address this is by demonstrating a strong pipeline of both platform and add-on acquisition that support the completion of the current fund. In addition, showing the strength of the portfolio and where possible providing/forecasting upcoming liquidity events will give investors comfort that they aren’t overcommitted to a sponsor at a given time.

Another area that requires careful messaging is volatility in a track record. Too often a firm’s underperforming investments overshadow its strong performance and that shouldn’t be the case. Preparing thoughtful materials around the lessons learned from those historical missteps and how that has enhanced and strengthened the team’s investment process and deal execution needs to come through proactively to assuage LP concerns. Specific changes that can be linked to improved decision-making are particularly effective in helping LPs understand how these prior investments have shaped future actions on the part of the firm.

Team dynamics are also an area where LPs can develop negative impressions or have strong feedback. If there’s one dominant figurehead or an aging founding partner, it can often create undercurrents within the firm that LPs become aware of through their interactions with the broader team or that they become conscious of in discussions with other LPs. In order to address this type of apprehension around the team, a fund manager can look to more equitably divide the carry within the partnership or increase the decision-making authority of other team members by formally including them on the Investment Committee. Actions speak louder than words in this regard and when a GP takes the initiative to improve the quality and strength of its senior leadership, it signals to LPs that the firm is positioned well for the future and is long-term focused. As investors in 10-year investment vehicles, they are very fixated on this issue.

Please remember that some LPs won’t come out and highlight a problem, but they will tip their hand in meetings, calls and follow-up diligence. It may take some sleuthing to figure out what their hang-ups are, but keep a keen eye out for the message between the lines because it can be the difference between a successful rebranding of your firm (an oversubscribed fund) and floundering in the market. In short, the sponsors who thrive under the pressures and stresses of fundraising are those that look at these “criticisms” in a more constructive light and embrace the opportunity to change the dialogue and strengthen the brand of their franchise.

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