60 Seconds With Sixpoint: The LP Dating Game
The LP Dating Game: Previously, we discussed the ways that GPs are attracting “incentive seeking” LPs to commit to a first close, which included: establishing a strong “re-up rate”, putting forth a prudent fund size, and providing fee incentives among other tools. The positive response we received from readers begged the question: who makes up the rest of the LP universe? Most importantly, how should GPs approach these groups to garner a commitment? In order to understand the best approach, Sixpoint categorizes LPs into four distinct groups:
1) Thought Leaders – these strategic thinkers are often the first-movers in GPs that are focused on a particular geography, strategy or investment type. Thought Leaders often are the first to identify and then participate in the opportunities in emerging markets, the secondary market and distressed investing. Research-driven and forward-looking, these LPs don’t look for consensus or wide acceptance of trends before moving. They have the long-term orientation to withstand being the early capital into these areas and seek outsized returns for this risk.
LP Types: Endowments, Family Offices and select Fund of Funds
2) Incentive Seekers – aggressive LPs that seek a strong value proposition in exchange for their capital. They are less likely to venture into new geographies or strategies alone, but they are willing to be anchor investors or first closers in emerging mangers if there are other opportunities for them to reduce their fee burden or if there are additional “bites at the apple” available. Incentive Seekers typically have separate teams that look at co-investments and secondaries, which can be directly involved in the decision-making process on the primary side as well.
LP Types: Insurance Companies, Family Offices and select Fund of Funds
3) Fund Trackers – this category of LPs makes up the bulk of the North American LP landscape in the market today. These LPs may also seek incentives, but because they usually aren’t first closers, they need to find ways to stand-out among this more competitive LP class. As a result, these “Fund Trackers” can negotiate terms more commercially. They often like to watch or track funds in order to evaluate upcoming exits in prior funds, new investments in the current fund and potential co-investments that become available during the fundraising period. This group is more cautious by nature than the “Thought Leaders” or “Incentive Seekers” and require funds to be “de-risked” before they make a commitment.
LP Types: Pensions, Consultants, Insurance Companies
4) Final Closers – this category of LPs has traditionally been comprised of Fund of Funds, consultants and other LPs that have a heightened sensitivity to “J-curve” issues. One of these two types of LPs isn’t as keen on co-investments as Fund Trackers, but they love the notion of “embedded value” or “pregnant primary” because of how this mitigates fee drag that their inherent two-tier fee structures often make undesirable to their underlying investors. Occasionally these groups will look to place a cap on the fund’s size or set additional parameters on fundraising, but this is situationally dependent. While this group can sometimes create frustration for anxious GPs there are many LPs within this category that are much more valuable than sleepy “follower” money and can be strategically valuable in the same way that we think of Thought Leaders.
LP Types: Fund of Funds, Consultants (including their underlying clients)
GPs frequently use the same marketing playbook to sell their fund to all LPs, when in reality each LP is driven by different facors. As you have just seen, implementing the same strategy with these investors with wildly varied motivations and processes would be ineffective and misguided. The right placement agent with intimate knowledge of the market can be invaluable when approaching each of these types of LPs.
Next on 60 Seconds with Sixpoint: We will discuss LP dynamics as it relates to fundraising. There are four types of LPs you will encounter in fundraising. Know your LP prospects…What are the best ways to address their needs and tendencies?