How to Guarantee Your Allocation Before Year-End
Regular readers of this blog will not be surprised to hear me say that the most sophisticated managers are always marketing. We see it day in and day out at Sixpoint – GPs that are deliberate about how they structure their LP outreach and diligent while implementing it consistently see better uptake from the market and stronger traction. Today we will focus on the other side of the equation, namely, when is the best time to engage LPs based on their allocation schedule? LP engagements take a long time before finally getting to a commitment – many months in some cases. This is partially due to the level of diligence that most LPs require before committing to a fund, but lately even more so due to LPs having to manage extremely crowded allocation calendars. Case in point, several LPs have recently told Sixpoint that they are drawing from their Q1 2019 allocation today – in June!
In this kind of environment, timing is everything. If we break down a fundraise into its three component stages – investor relations, formal pre-marketing and official launch (often simultaneous with a first close) – the key insight that GPs need is when to switch from one stage to the next. This isn’t as straightforward as it seems. Go too early and you might get lost in the shuffle with other GPs. Go too late and the LP may already be fully allocated for the year. As we know, that can be much sooner than expected! Generally speaking, LPs are usually building their pipelines two to three quarters in advance. In other words, they consider a Q2 2018 pipeline opportunity for their Q4 2018 or Q1 2019 allocation. Q3 2018 pipeline opportunities are for a Q1 or Q2 2019 allocation, and so on.
With that said, here are my top three recommendations which I hope you will consider while planning your next fundraise:
- Have a strategy for each LP. Most LPs have their own quirks or idiosyncrasies that will be important to know before launching into a process with them. Some LPs will have a first meeting, jump straight to an onsite, then do desk work for a month. Others might require two separate onsites or a trip to a portfolio company as part of their diligence. If you have other considerations around launching or closing your fund (deal pacing, re-up considerations) this becomes even more important.
- Know when to flip the switch. GPs often voice concerns about switching from investor relations to formal pre-marketing and for good reason – this is the most critical juncture of a fundraise and can make a big difference for the raise. There are a number of considerations here as it relates to timing – what stage of the allocation calendar are your target LPs in? Will you have a good uptick in marks over the course of the raise? Exits? New deals? This whirlwind of factors can rightfully make GPs nervous about choosing the right time to put it all on the table and jump into pre-marketing. There is no one-size-fits-all advice here, but I will say that you shouldn’t let perfect be the enemy of good. There will never be a perfect time to make the jump, but you should be hyper-focused to ensure you don’t miss the LP’s allocation calendar.
- Communicate. As you know, courting LPs involves constant communication about your portfolio development, team changes, expansion plans, strategy refinements, etc. However, it is equally important to keep in close touch with LPs about timing for your fundraise so they can work to harmonize their calendar with yours. Remember that LP engagements are a two-way street, and LPs can certainly be convinced to operate on your timeline with the right kind of cajoling.
There is a lot of nuance that goes into timing your LP engagement effectively and ensuring that you get your allocation at the right time. As always, we are always happy to act as a sounding board.
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).