How to Ensure Your Fund is 2x Oversubscribed
While out on the road meeting with sponsors recently, I have been speaking about the importance of generating outsized LP demand in every given fundraise. GPs uniformly look to meet (or exceed) their fund hard cap, but rarely do they have a true capital target or LP profile in mind. Simply stated, if you are seeking $500 million of capital, the appropriate level of LP demand is $1.0 billion — at least. Generating excess demand allows GPs to make assessments about which sources of capital they want and the qualities that they are looking for from investors. An asymmetric supply/demand dynamic also serves to create a halo effect around the firm that enhances brand identity which is self-fulfilling. It’s like wanting to manage the line out the door of a hot restaurant or club. If the line is too short then passersby don’t think the place is desirable, but if it’s long enough people will gravitate towards it and get in lock-step with other investors. While excess demand is the goal, there are also responsibilities that come with managing this outsized interest. The demand needs to be maintained by being responsive to the information requests and meetings while ensuring proper management of expectations and the turndown process. In this week’s issue of 60 Seconds we’ll talk about why this is important, followed by some specific tips on how you can accomplish this goal.
Creating demand is about timing, communication and LP knowledge. The proper timing of the fund launch is critical to having the right LP support/demand at the specific time that you’ll be in the market. LPs need sponsors to telegraph this timing to them and help them get the fund on their forward calendar. Many LPs develop their forward calendar out to 12 or 18 months, so it’s important that sponsors understand that this is the timeline off which investors work. It’s important for sponsors that expect to be oversubscribed to transmit clear and consistent expectations around the process to interested parties and to use the flow of information as the guidepost to pacing and capacity. In other words, every LP in your fundraising orbit may be afforded a baseline amount of information as you leg into the marketing process, but the more you accelerate your process and near your formal fund launch, the more important it is to segment LPs so that their expectations can be managed.
For LPs you definitely want in your first or final close, maximum information flow is key. It’s also critical to “overwhelm” the LP with data so that they remain focused on your process rather than getting distracted with other investment opportunities while your investment team is scrambling to keep up with due diligence information requests. For LPs lower on the priority scale but equally important to maintain within the overall fund process, only select data should be made available until the yellow sign turns to green and they can be invited into the first close process. This approach will have the dual benefit of managing your own team’s capacity and resources internally while ensuring Tier II LPs are only asked to do a level of diligence work commensurate with their place in line. Frequently LPs complain that they aren’t kept informed or the information provided is inconsistent when it came to these accelerated processes. GPs are notorious for missing timelines (often because of slow-moving LPs), but in light of this, LPs often think they have more time than may be indicated to them or that they are further advanced in the process then they truly are.
Some sponsors struggle to provide LPs with clear guidance on whether they will receive allocation and the turndown process can then damage a relationship or brand. Sixpoint has extensive experience facilitating a smooth first to final launch process and handling these delicate discussions so that they end up becoming the brand enhancing exercises that sponsors hope for.
Next on 60 Seconds with Sixpoint: Solutions for Managing Out Your Legacy Portfolio
Sixpoint Partners, LLC, is a registered broker/dealer, member FINRA (http://www.finra.org) and SIPC (http://www.sipc.org). Sixpoint Partners Asia Limited is licensed by the Securities and Futures Commission (http://www.sfc.hk).