Managing and Cultivating Relationships with Consultants
The role and importance of private equity consultants has evolved significantly over the past few years. Historically, many GPs were baffled by how consultants operated and given the vast dollars that these groups represented, it became a clear point of frustration for groups trying to raise capital through these channels. One of the issues is that each of these consultants has its own process and works with its clients in a different way. The lack of uniformity in the approach/process can make it challenging for the uninitiated to navigate the complexity that is often involved in earning the seal of approval from these industry-leading gatekeepers.
In certain instances, consultants will only take action on the diligence side if they have (important) underlying clients requesting them to do work, so approaching them directly is futile. They need to be contacted directly by their client and asked to take steps. This approach is becoming increasingly less common as consultants, possibly at the prompting of their institutional clients, are taking a more proactive approach on behalf of clients. Typically, this takes the form of a research or thesis-driven canvassing of the private equity market that allows them to form a complete picture of investment performance, terms, structure, etc. and in doing so more accurately impart high quality guidance to their clients based on this knowledge base.
The frustration felt by GPs is that they often become excited by the initial interest of these consultants and become discouraged when after weeks of furnishing them with large quantities of data, they realize that their efforts aren’t rewarded with further meetings or dialogue. The due diligence requests are frequently time-consuming for GPs that are less familiar with the documentation required to satisfy these initial hurdles. Depending on the consultant’s relationship with their client, they may act as a discretionary manager of the client’s assets or it may be non-discretionary. In some instances, both types of clients may be appropriate LPs for the fund, so the processes involved will require separate types of follow-up. Non-discretionary clients will rely on the consultant for specific types of due diligence and advice during the process, but will also look to run their own due diligence process.
There are a few key reasons that non-discretionary clients seek the use of outside resources in the form of a consultant, but chief among these are: i) ability to leverage the consultant’s research, market knowledge and sophistication, ii) lean on specific types of due diligence that may be a challenge for the client to perform themselves, and iii) as a litmus test to confirm the evidence of their own diligence efforts. On that last point, it is important to understand that when most consultants decide to recommend a fund, they provide their clients with a short report that lays out their findings. Developing relationships with the senior consultants that drive the findings shared in those critical reports is important because understanding and addressing their key concerns upfront can determine IF you receive their recommendation and also HOW they recommend the fund. The key concerns can change over time or be influenced by the needs and changing demands of the investment programs of their underlying clients.
That being said, deep relationships with the senior consultants developed over years of working together allow for insights into the thinking and approach that each of these advisors takes when looking at the market, enabling one to proactively adjust to those sensitivities to make the process easier. Consultants also require time to work through their extensive due diligence process and then work with clients, so they appreciate being contacted earlier in the fundraise to allow the necessary time to review the materials and engage their clients. It is also crucial to pay close attention to what the consultants tell you about their relationship with their clients. It is important that the GP appreciates the sensitivity of these relationships and doesn’t interfere or disintermediate the consultant in this process. In the rush to find the person pulling the purse strings, GPs can sometimes lose sight of the fact that these consultants are running their own businesses and certain actions can negatively impact their relationships with these clients. Circumventing the consultant can make them look uninformed or lacking in their follow-up or initiative. This can become very counterproductive for all parties.
Fundraising is like dancing and in dancing there’s a lead and a follow. Consultants are the lead in this scenario, so follow their lead and your dance card will never be empty!
Next on 60 Seconds with Sixpoint: LP Turnover: Sounds like Dessert, Feels like Desertion