The LP HOV Lane
The goal of any well-run investor relations or pre-marketing program is an efficient fundraise that minimizes guesswork and unpleasant surprises when closing LP commitments. Sponsors are frequently frustrated or bewildered by their interactions with LPs, and each party feels like they are approaching the prospective relationship from very different places – a veritable “GPs are from Mars, LPs are from Venus” type of situation. One factor, inherent to fundraising, that causes friction in these discussions is that LP decision-making lacks any type of uniformity. When GPs fundraise, they typically engage a broad cross-section of the LP universe and the challenge of navigating the personalities, processes and program idiosyncrasies can make even the most patient sponsor a little crazy. In our experience at Sixpoint, one of the best ways to avoid these issues is to create framework that serves to organize these investors in such a way that helps to avoid the labyrinth of each LP’s investment process.
An advantage of the IR program and pre-marketing work is that you have an opportunity to develop and deepen relationships with engaged LPs and let the less interested groups self-select out of the process. The importance of this cannot be overstated. GPs will often have less than a handful of LP relationships where they have 100% visibility into their programs. Outside of this limited group, there is often a dramatic drop-off in the quality of the relationship and likewise comprehension of the LP’s investment needs. The problem here is that running a highly organized fundraise relies on knowing your audience. It is impossible to cater to the needs of a quality group of blue-chip supporters if you don’t know specifically what they need or what their potential areas of pushback are. Once you determine the core group of LPs that will support your upcoming fund, it is then important to set the framework of the fundraise into motion.
Engaged LPs will respect and appreciate a thoughtful and well-organized fundraise process. The timing of the fund launch, the timeframe for due diligence and the closing dates should all appropriately reflect the timing needs of the core group of LPs that you are relying on for a very strong first close (>40% of the fund’s target). It sounds obvious, but we frequently find that GPs are surprised to the downside by these core LPs because they misinterpreted something about the timing or process required by an LP. Once you’ve taken the inputs, it’s then incumbent on the GP to lay out a very specific timeline of milestones for the LPs that will serve as a guide for them to close. As part of this fundraise framework, the core LPs are sometimes provided what we’ve dubbed “the LP HOV lane.”
The LP HOV lane serves as a privileged look by which the most highly valued early closers are given access and attention that is commensurate with how the GP views this partnership. LPAC members are often the beneficiaries of this level of attention, but the LP HOV lane should not be limited exclusively to the LPAC. When executed properly, it should serve as a way to “reward” and embrace prospective LPs that have shown themselves as long-term value-added investors for the firm. These LPs will often come onsite before the GP has taken the fundraise out to the market, so they are provided a more personalized and tailored diligence experience that is often difficult to accommodate later in the fundraise when dozens of LPs have calls on the GP’s attention and time. The benefit to GPs of offering this tailored window of access is that these sophisticated LPs can provide feedback on changes to the fund’s terms, strategy or personnel before the rest of the market is responding. This is critical information from the investors closest to the GP. The other big advantage to the GP is that these LPs can work off a tighter timeframe, completing their diligence on an expedited basis that best serves the capital needs of the sponsor. Finally, the ultimate purpose of creating an HOV lane is to allow multiple LPs to travel and reference together. Creating a strong buzz about the fund, especially if timed around AGM season, can create an added sense of momentum that feeds the scarcity value we all know is required. When it’s executed flawlessly, it can truly be “the start (or continuation) of a beautiful friendship.”
Next on 60 Seconds with Sixpoint: LP Perspectives on Investment Pacing in an Expensive Deal Environment
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).