How to Foster a Strategic LP Base

An LP can be viewed as strategic to a PE sponsor for a myriad of reasons depending on the structure and goals of the firm, but two core attributes sought in almost every circumstance are consistent access to capital and long-term view of the market. Strategic LPs can be helpful when thinking about an industry or particular investment. Many family offices and other types of institutional investors with industry expertise can be advantageous to the investment team. For example, large endowments and foundations often have well-funded Research & Development departments that are actively involved in the healthcare and drug royalty spaces. PE funds that target this space may find that E&F investors broaden their network and facilitate insights that other LPs may not. We have seen numerous other examples like these occur over time.

LPs that have a strong co-investment program can give the investment team the flexibility to pursue attractive opportunities that may exceed the fund’s investment size limitations. This flexibility is hugely valuable in today’s market where valuations can push the limits of what sponsors feel comfortable exposing LPs to in their commingled funds. LPs with an ample supply of capital AND a flexible mandate are particularly powerful partners for sponsors because they can assist sponsors on several fronts. We’ve discussed the advantages of an LP’s first close capital as well as their support of a platform buildout beyond a traditional one-fund offering. LPs that are helpful to sponsors in their launch process are cherished by GPs because without their backing, these initiatives can be hard, if not impossible, to get off the ground. There are LPs that also provide leadership and guidance on the LPAC, which can be very helpful to the Managing Partners when critical moments for the firm require LPAC involvement. Examples of these situations include key person issues, conflicts of interest, investment / fundraising period extensions and other “game-changing” decisions that shape the future of these firms.

So, how do you develop or foster these relationships with strategic LPs? It begins with identifying the right partners within the broader LP community that fit your ambitions and goals. Sixpoint has a strong history of connecting these LPs with our clients, so we’ve spent a significant amount of time discussing these issues with LPs. Many investors want to think of themselves as strategic and are well intentioned in this regard, but they may make overtures or statements about wanting to engage on strategic initiatives on which they simply can’t deliver. We’ve had the benefit of observing the groups that say the right things and then follow through on those statements, so these are first-call investors for our clients who are looking for these types of strategic partners (basically every client). These LPs are so desirable, beyond simply their checkbook, that they have their pick of GPs, even those oversubscribed “one & done” groups, so attracting them to your offering is a competitive process.

Approaching these discussions early and with careful preparation is crucial to earning these LPs’ mindshare. If you have a co-investment opportunity, a new fund vehicle or another initiative, these groups can be very thoughtful about structure and approach given the depth of their experience and general sophistication. They appreciate (and in some situations expect) the ability to give input and have a voice in these discussions. These LPs are viewed as strategic because their counsel and insights are best-in-class and they think like sponsors. Once you’ve had the good fortune of securing a commitment from a strategic LP, it’s important to prioritize that relationship and keep them close. They are likely partnered with other high quality sponsors who are also showing them deal flow and providing them with a lot of communication. Overall, these high-touch and key relationships expect transparency.

Next on 60 Seconds with Sixpoint: Three Ideas for Building Your LP Library of Documents

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