How to Convince LPs That Your “Special Sauce” Really Is Special

To win investor mindshare, you have to stand out from the crowd. The largest and most active LPs are often meeting with upwards of 20 private equity sponsors per week; so how do you differentiate your firm and leave a lasting impression?

How to begin? Emphasize your edge or “special sauce” by highlighting its direct correlation to producing outsized results now or in the future. Ultimately, investors are most keen to understand how your firm’s edge provides a competitive advantage that results in a better risk-adjusted return. In many instances, firms brand their edge – complete with trademark and registered filings – so that they have exclusive rights to use their name/brand in a private equity context. Some groups have difficulty identifying their edge because so many firms can now execute the traditional “PE playbook.” It can be challenging to find a way to set yourself apart. For example, many PE firms genuinely had an ability to access non-auction transactions but so many sponsors co-opted the concept that the term “proprietary” lost its meaning, making it more difficult for firms to market this sourcing angle as their edge.

One way to identify your edge is to reflect on how you pitch management teams. What do you tell entrepreneurs or company founders about your firm’s value proposition that may be different from what other groups say and do? If your pitch relies exclusively on your M&A abilities, operating bench or culture of partnership, then it may lack teeth for marketing to LPs. Just like proprietary deal flow, most PE firms lay claim to these same attributes – or some combination of them. I meet with sponsors across the country on a weekly basis and in all these discussions what I have found resonates most successfully with LPs is something that meets the specific “needs” of lower middle-market companies. An operational expertise that goes beyond that of Fortune 500 executives who sit on boards and instead focuses on supply-chain optimization, ERP systems or human resource expertise. Likewise, innovative structures or research-driven initiatives will help set you apart both in sourcing transactions on the front-end, and through execution. In-house teams that have expertise tailored to your strategy (legal backgrounds, technology backgrounds, etc.) are particularly attractive to LPs given the internal alignment and value investors get from that bench of resources. Clearly identifying your competitive advantage is a key first step toward being able to package and successfully market that concept to LPs.

Once identified, the best way to illustrate this edge is to go through the portfolio and show a series of examples that best highlight the cases in which the firm used its edge and the specific impact that it brought to the successful origination, execution and exit of the investment. As the in-flows of capital into private equity remain steady, business founders have many options when selling their company. The PE sponsors that can best articulate and prove their competitive advantage will have a leg up in these discussions.

Next on 60 Seconds with Sixpoint: GP Stake Sales in the Mid-Market: The Next Wave

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