How to Navigate an LP’s Investment Committee

Private equity sponsors frequently overestimate how deep and broad their relationships are in the institutional investor market. In some cases the relationships truly are impressive and noteworthy, but we often find that there’s a disconnect between some sponsor’s sense of the relationship and the actual percentage of the LP’s mindshare. In fact, we sometimes find that even existing LPs, which have invested with the PE firm in prior funds and should be close relationships, sometimes aren’t. So, why is that?

Sixpoint’s relationships with the institutional investor community spans different funds, strategies and capital solutions, so our dialogue with LPs is continuous and dynamic. We have a constant supply of reasons to interact with these investors and they view us, like other close placement agent relationships they may have, as a valuable industry resource. PE firms are disadvantaged in this regard because they typically have a singular reason for contacting LPs. Over the course of Sixpoint’s investor communiques, we develop a dataset, not unlike a behavioral analysis, that allows us to understand the LP better. We develop a profile on their program and key decision-makers, how they have invested in up and down cycles and we have observed (and noted) what catalyzes an investment for them, or alternatively, what hot button issues will result in a turndown. In short, when sponsors are only speaking with LPs about a single offering, it can be very challenging to get a read on what’s going on in their process and many LPs keep the inner workings of their investment decisions deliberately opaque.

One of the most valuable aspects of understanding an LP’s investment program is getting a clear sense of how to navigate their Investment Committee because ultimately that’s how decisions get made. For many LPs, the IC is at work in the background from the very first interactions even if the CIO or other senior decision-makers aren’t on the emails, calls or in the meetings. In fact, it’s very common for LPs to have their senior team screen opportunities first before the sponsors get to the next round of meetings with key decision-makers. After an initial meeting, the opportunity will likely get presented or discussed at the LP’s internal team meeting. These happen weekly for most LPs, but many public pensions only have these discussions monthly, so following up too aggressively will appear over eager and out of touch with their approach. The takeaway: manage your cadence of follow up to the specific LP’s own internal process. It’s critical therefore to know in advance what that process is.

If the discussion goes well, the investment team will begin to perform “desk work” on the opportunity. This will involve data room access and frequently a series of bespoke data requests. Response time and the quality of the materials provided during this period cannot be overemphasized. LPs are very sensitive to getting quick turnarounds and receiving information that is thoughtfully presented and in a format that they can work with. Many sponsors grow overconfident in this stage of the process and don’t appreciate that the LP is still very much evaluating and assessing each interaction and document. Slow responses or sloppy deliverables can kill a deal in its tracks here. Remember that at any moment you are being evaluated and battling for mindshare against at least 5-7 other managers.

We often see follow-up discussions that involve questions around specific issues that are more complicated or easier to address on the phone instead over email. Once this process has run its course, many LPs will look for a follow-up meeting that involves the CIO and/or other key decision-makers. The questions that came up in the “desk work” portion of the review process frequently reflect the concerns of the Investment Committee members, even if they came from an analyst or associate, so this is a signal of what to expect in this follow-up meeting. If this follow-up meeting is successful, the IC will typically meet and pre-approve an opportunity. This pre-approval will involve green lighting an onsite visit that may or may not include CIOs themselves. Preparation for this meeting is critical.

Once these steps in the process are complete, the IC will provide a final approval for the investment with specifics around the commitment size and any key conditions. This is all subject to a final legal review. There’s a wide disparity of how onerous an LP’s legal process will be – from aggressive hard-fought negotiations on every term to a perfunctory review that serves as more of a sniff test for anything off-market. Again, knowing which LPs emphasize this type of review will help determine how you interact with them leading into this portion of the investment process.

Finally, the key to getting to a positive result with most LPs is careful listening. Over the course of time spent together, they will signal to GPs what interests them and what concerns them. Some LPs are subtle in how they communicate these issues, so it’s incumbent on the fund managers to pick up on these indications and get in front of them where possible.

Next on 60 Seconds with Sixpoint: How to Foster a Strategic LP Base

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