US limited partners have grown much more comfortable with international exposure in the last few years. LPs, once fearful of sending their capital overseas, now commonly want as much as 30 percent or 40 percent of their private equity portfolios invested in international funds, says Dan Vene, a partner at global placement agency CP Eaton. The more progressive firms are targeting a 50-50 split between domestic and international exposure. Although they're increasingly looking abroad, most LPs are still dramatically underweight in their international allocations across all asset classes.
?Frankly it's a very promising trend for foreign general partners that are looking to target US institutions,? Vene says. ?They definitely have the wind at their back.?
General partners from Europe, Asia and beyond need to know five important things about fundraising in the US before coming Stateside. There are some pitfalls ? cultural, regulatory and logistically ? you should avoid.
1. Don't be shy
You can make the first move in approaching an LP, even if you're a first-time fund, says Paul Denning, founder and chief executive of San Francisco placement agency Denning & Company.
?Sometimes people come over here and, culturally, they aren't used to making a cold call,? Denning says. ?If you can get a referral it's better, but if you don't have that, then you're going to have to cold call.?
In lieu of a referral, he recommends sending a note first, an email or even a letter. The latter might appear clunky in a digital age, he says, but it's so unusual that the LP is unlikely to forget you.
Getting in the door is a relatively easy step in the process. US LPs tend to be more opportunistic than their counterparts abroad, says Charles Lemon of UK placement agency The Matrix Group. Whereas a European LP might have its list of 10 or 20 foreign fund managers it would invest with, US LPs are fairly receptive to meetings with managers they aren't familiar with.
Part of the reason for this is that for US LPs, the first meeting is often very preliminary, says Mounir Guen, chief executive of placement agency MVision. US LPs will take meetings just to learn about a market, or to see if they like an GP and want to schedule a follow-up meeting.
Furthermore, it's also more common for them to make room for a promising manager at any point in the allocation cycle, Lemon says, whereas European LPs need to be approached early in the fiscal year, before they have made their allocations.
2. Don't pitch by the book
The purpose of the first meeting is to get a second meeting, says Denning. Whereas in Europe the first meeting is expected to be an exchange of detailed information, in the US the LP simply wants to get a feel for the manager.
?Every general partner wants to come in and fill you up to the ears with facts about them and their fund and how great they are,? Denning says. ?The person on the other side of the table could care less. What they're looking for is ?When this group walks into my office, do I like them, do I trust them, and do I think they know what they're talking about.? If you can convince an LP of those three things, you've accomplished your goal.?
In other words, remember that the meeting should be conversational, and put away the PowerPoint and the pitch book. Getting down to the nitty gritty is likely to put people to sleep, he says. Rather, pay attention and try to discern what the LP wants you to talk about.
?You have to be extremely empathetic in that first meeting and find out what the limited partner wants,? he says. ?Maybe some people want to talk about your team, maybe other people want you to talk about your deals, maybe some people want you to talk about your family. You just go where they take you.?
3. Send in the big guns
In other countries, firms might send sharp mid-level principals to meetings as a way of showcasing the depth of their team. But in the US, expect to send no one less than your top guy, Denning says.
?If you send in some subordinate, [the LPs] think ?Well, what are we, chopped liver??? he says. ?They want to hear it from the horse's mouth, and they want to think that you dignify the meeting enough to come yourself.?
There is also a perception among US LPs that the top people at a firm are reflective of those around them, whereas if a junior partner shows up at a meeting an LP might wonder what's wrong with the senior guys.
?If you come all the way to Boston from Dubai, and you send your number two or number three guys, an LP might think, ?Well I wonder what the rest of the team looks like.?
At the same time, if you're from a non-English speaking country, be sure to bring someone who is comfortable with the language and who has some familiarity with US business culture, Vene says.
At the same time, ?It's important to have someone who can communicate and can make that connection,? he says. ?Even if you have to bring someone on the road who isn't your number one or number two person, if they can bridge that gap and they're a good marketing talent, sometimes it's very helpful.?
4. Structure carefully
It's important to think about who you want to market to as you decide how to structure your fund. For instance, you should know the tax status of every US LP you plan to pitch to long before you walk into a meeting, says Richard Ginsberg, co-chair of law firm DLA Piper's fund formation practice. Certain categories of LPs are tax exempt, including non-profit organizations and public pension funds. These LPs can't invest in flow-through entities, like limited liability companies, without generating unrelated business taxable income (UBTI). If the returns from your fund are the only income that requires an LP to file a tax return, they might opt to forgo the hassle. It might be more fruitful to approach this type of investor if you're planning to invest solely or mainly in C Corporations, which are separately taxable entities.
These days, GPs also need to be sensitive to currency issues, Ginsberg says, as the value of the US dollar is a moving target. A US investor might make a €15 million, $23.7 million commitment in January, but if the dollar declines that could turn into a $25 million commitment by June. Setting up a hedge against currency risk is an added cost and administrative burden for the LP. The GP could set up side-by-side funds, one denominated in US dollars, but that poses additional challenges as well. Say the funds start out at equivalent values, and the GP invests €20 million in a company, pulling €10 million from each fund to pay for the company. At this rate, the dollar denominated fund will run out of money first if the dollar loses value against the euro. Ultimately, GPs tend to choose one currency and stick to it. But choosing which currency to use should be a reflection of who you think will make up the majority of your investor base, Ginsberg says.
5. Educate your investors
Don't assume that a US LP knows much about market conditions in your region. Especially for LPs who are just starting to invest abroad, you should devote a large part of your presentation to explaining your macroeconomic and geopolitical climate, says Vene.
?Sometimes GPs get far too granular far too early in the presentation or in the market process, when it would be more helpful to take a step back,? he says. ?A pension fund in Texas may not have that much knowledge about what's going on in Shanghai, so it really does help to get people up to speed so that now you have the framework to dive into your particular strategy.?
Particularly for emerging markets managers, it's also important to explain how you added value above and beyond the rising tide of overall growth in your home market.
?You need to stress that you're not just riding the market; you're not just benefitting from the global liquidity that we've had in the last few years,? Vene says. ?You have to differentiate your performance from your overall region's performance.?
Just how hard you'll have to work to get an LP comfortable enough to invest depends on what type of institution they are. Family offices tend to be more progressive, Vene says; they tend to be earlier movers and more global in the scope of the investments. Big pension plans, on the other hand, have stricter liability requirements and will be more cautious about putting money into a new region.