60 Seconds with Sixpoint: How to Balance Strong LP Demand But Uncertain Timing to Close
Many of the articles I publish focus on what to do if you hit roadblocks during your fundraise. One area I have not discussed as widely is what to do if your fundraise is going well. Having strong uptake in the market and a fast-moving process with LPs can lead to a new set of potential challenges, and GPs should take care that they keep their eyes open to these issues and develop strategies to mitigate them.
When there is strong initial uptake from the market, it can be difficult to properly time your engagement with different LPs in order to have them coincide for a single close. This is due to the fact that the uptake is usually dominated by several very fast-moving LPs who want to move aggressively on timing. Unless these fast-moving LPs speak for enough capital among themselves to hold a sizable close, your challenge as the GP is to balance them with a broader set of slower-moving but equally interested LPs. You can use their aggressive timeline as a catalyst for other LPs, but you want to be careful that you strike the proper balance between moving quickly enough for the fast-moving LPs but not too fast for the remaining investors. After all, even an interested LP will pass on the fund if they don’t believe they will be able to make the timing that you are demanding. When dealing with such a scenario, always manage the final close messaging relative to the demand profile of the later closers. In a market that is hyper crowded, investors won’t pick up their pencils if they feel they have a lot of time or not enough; this is the message manage management that is key to deliver.
Another issue that may stem from strong early uptake is going too broadly out to the market. GPs should carefully reevaluate their go-to-market strategy and find ways to economize their fundraise by narrowing the list of LPs that you go out to so as not to initiate a pre-mature launch. Ideally, your existings will take up 40-50% of the demand at the first close (and possibly as much as 70%). In either scenario, your outreach should be broken out into three tranches from that point: (1) early look LPs that can participate in your first close (2) second or follow-on closers that can complete the fundraise and (3) late closers to round out the LP Base. Not all LPs behave the same and thus you should interact with each category of investor a bit differently. Some LPs will want to see you further along in the process, others like to step in early to define terms or secure preferential treatment. LPs also put a heavy premium on which other LPs have committed to your fund and having a blue-chip name can really move the needle for an LP that is on the fence. In fact, many LPs quietly invest in groups and securing one LP can bring along several others; knowing those interlocking relationships is something an advisor can help you with.
Finally, another challenge you may face is how to manage expectations with LPs about the allocation they can expect in the fund. There are few things more damaging to a GP’s reputation than overpromising and underdelivering allocations to LPs. It is understandable that you will want to keep LPs warm throughout the process. After all, strong interest from other LPs is not the same thing as a commitment, and you would be right to build a backlog of demand should anything go wrong in that respect. However, you should be as upfront as possible with LPs as it relates to the size of commitment they can expect. Your agent may be in the best position to manage these conversations, as you will likely want to put an additional layer of separation between your firm and the LPs while delivering uncomfortable news.
If your fundraise is going strong – congratulations! Despite the traction in the market, stay focused on managing the process and not just collecting the orders; doing so will help you mitigate some of the unexpected issues that may come up later down the road.
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.