LP due diligence becoming ‘brutal’

When comparing their recent experiences on the fundraising trail to those in the past, over half (53 percent) of private equity managers say the biggest change is how extensive LP due diligence has become, according to Grant Thornton’s latest annual global private equity report released on Thursday.

“Brutal is the word. It is an incredibly tough market: multiple meetings, huge amounts of due diligence questionnaires, very skeptical LPs, low conversion rates,” is how one US-based GP respondent described the current magnitude of LPs’ due diligence in the study.

LP due diligence – a term the study includes to mean information demands, deal pipeline visibility, investor portfolio visits and dataroom presentations – outranked all other perceived changes in today’s fundraising climate.

The second biggest change cited was LP conversion rates (i.e., how long it takes investors to make a commitment decision and at what size), with one in five fund managers calling this the biggest change in today’s fundraising environment. This followed 16 percent of fund managers who cited the number of LP meetings held as the biggest change, followed by 9 percent of fund managers who cited the depth and breadth of LPs targeted on the fundraising trail as the biggest difference in their most recent fundraise.

To encourage LPs to make a commitment, more than a third (35 percent) of GPs said they expect to offer more co-investment opportunities to LPs. In the research, GPs noted that LPs are not always able to follow through, or are indeed interested, when co-investment opportunities are actually presented.

Only 16 percent of GPs said they expect to offer fee discounts to investors in a bid to secure a fund commitment, but 27 percent hope to entice LPs into their funds by offering a seat on the fund’s advisory board committee.

“There is more pre-marketing to qualify the LPs,” said a second France-based GP in the study. “But pre-marketing today is something you do on an on-going basis. It is not just something you do six months before the fundraising, it is something you have to do forever.”