60 Seconds With Sixpoint: The LP Dating Game Part Two

The LP Dating Game Part Two: Previously, we defined the four primary LP types: Thought Leaders, Incentive Seekers, Fund Trackers and Final Closers. Now that we understand the nuanced motivations and portfolio needs of these different categories of investors, we will seek to answer the question: how does a fund manager address those needs in the context of raising a fund?

First, there a few private equity fundraising fundamentals that GPs should consider before beginning conversations with LPs, including team composition, fund terms and a clear narrative. Less experienced fund managers often look for

LPs to make the first move vis-à-vis due diligence or verbally committing before addressing key inadequacies regarding the team or fund terms. This is a very quick way to lose LP interest because the competitive market that we are seeing today places an added emphasis on first impressions. Be commercial and prepared.

1) Thought Leaders have extensive experience working with fund managers from a strategic perspective including anchoring or seeding first-time funds and spin-outs. Given how early these groups are engaged and the significance of their role, they frequently are involved in re-drafting the LPA, determining the fund terms and in some instances team / Investment Committee composition. Thought Leaders like being approached early, but while it’s tempting to enter into these high-stakes discussions, there are dangers associated with engaging sophisticated groups before you are ready. If your story or team aren’t complete, Thought Leaders may pass right away and not reengage regardless of developments. Also, they may use their advantaged position early in the process to dictate non-market terms.

Key Takeway: Go early and leg into the marketing process, but a lack of preparation, research and professionalism will come back to hurt you in the process if you’re not careful.

2) Incentive Seekers should be approached very thoughtfully. We often see fund managers mistake Incentive Seekers for Thought Leaders and end up disappointed when these groups put them in ‘tracking mode’. The primary reason that Incentive Seekers decide not to move forward is quite simple: there aren’t adequate incentives to do so. Introducing your fund, team and strategy to an Incentive Seeker early in the process is a good idea, but following up with these groups should be around an opportunity. If you have a co-investment opportunity that fits their criteria or there’s a possible secondary becoming available then those are great opportunities to reengage them. Going back to these firms before you have something of ‘value’ in exchange for a commitment is a common mistake.

Key Takeway: You can approach Incentive Seekers early in the process, but follow-ups should revolve around co-investments, secondaries or potential fee breaks relating to size or timing. Resist ‘low impact’ update meetings.

3) Fund Trackers are the broadest category of LPs, so fund managers will need and want to meet with these investors during all stages of the process, but they won’t move early and shouldn’t be expected to meet interim closings without material updates that motivate their behavior. The updates that will help to move the needle with these investors include, but are not limited to: improvement in the portfolio, realizations in prior funds (recaps are often viewed as less impressive) and new deals in the new fund and any embedded value that has accreted to help mitigate J-curve issues.  There is a cadence to providing these updates and it requires a patience that is often difficult or frustrating for fund managers, but this measured approach is rewarded when the ‘drumbeat of positive news” over the course of the fundraise is executed perfectly and the investors are won over methodically in a “show me” not “tell me” fashion.

Key Takeway: Be patient and don’t overpromise on timing or exits. Fund Trackers will fact check your follow-through and execution over the course of the dialogue, so keep them updated methodically, but resist attempts to rush this natural relationship development.

4) Final Closers are driven by some very specific events and GPs that are mindful of these can frequently raise a substantial amount of their targeted capital from this group. Final Closers are very sensitive to J-curve issues, so “seasoned primaries” with embedded value are extremely attractive to them and they frequently wait to the end of the fundraise to get the best view on the fund’s investments. Gaining mindshare with this group early in the process can be difficult, so aggressive outreach isn’t an effective use of resources for time-sensitive fund managers. These investors will frequently resist any form of heavy due diligence until the fund target or true final close comes into view. Occasionally, the larger investors within this group will push to cap a fund’s size or limit its fundraising timeline at the very end of the process, which can be a welcome sight for road-weary managers.

Key Takeway: A significant source of capital that shouldn’t be ignored or dismissed because of their ‘11th hour’ approach. New transactions in your fund, exits in previous funds and leveraging scarcity will be key to corraling Final Closers.

Next on 60 Seconds with Sixpoint: We will discuss the shifting landscape of fundraising in a more volatile market: This edition will be part of a two part observation around shifting LP attitudes in the face of the recent market volatility. Specifically, (i) how is the recent market volatility manifesting itself in terms of LP demands, process and capital allocation and (ii) what is the market opportunity that such volatility creates from a fundraising context?

Sixpoint Partners, LLC, is a registered broker/dealer, member FINRA (http://www.finra.org) and SIPC (http://www.sipc.org).