Whether pitching a new fund or negotiating terms, the face time that GPs have with their LPs is always crucial, and a GP’s behavior during those interactions is inevitably scrutinized by the potential investor. We asked a few LPs and their advisors about what kind of conduct they’re tired of hearing or seeing from GPs during these make-or-break moments. Here’s the top eight, in order of how much they should be avoided:
8. Using the word “robust”: While all managers want to convey enthusiasm when describing their pipeline or investment activity, this buzzword is one that LPs have heard far too often. Any word repeated too often begins to lose all meaning and “robust” is more likely to bore investors than excite them.
7. Flaunting “proprietary deal flow”: It’s not that LPs don’t want managers to source off-market deals; they certainly do, and have come to expect it from a skilled manager. Therefore, any kind of “peacock-like display” of the phrase comes off as amateurish. Says one real estate consultant: “This may not have been true in the pre-internet, pre-global market place, but now even the least sophisticated owner can shop a deal. It’s no longer a useful term in distinguishing one vendor from another.”
6. Overstating your alignment of interest: While being perfectly aligned with their fiduciary is most investors’ dream, they are also aware of how rare it is that both sides will agree on everything. One fund formation lawyer noted the way LPs’ eyes have begun to glaze over when they hear the phrase: “Sophisticated investors know full well that interests are not perfectly aligned by a long shot. Each party has their own economic interests.”
5. The limo or jet out front: With all of the scrutiny from the investors and the SEC alike on expenses, it’s surprising to hear that some GPs are still guilty of showing off. When visiting LPs, modesty is the best policy. “It’s a matter of not being conscious of how they’re presenting themselves and being aware of the fact that they’re a fiduciary,” says one lawyer. “Don’t wave that red flag for them.”
4. The misrepresentation of returns: This becomes an issue especially when presenting the use of leverage, LPs say, and the inability to display unlevered past performance. “This is always my ‘lose my patience’ moment – when historical returns are presented without attribution. There’s a difference between adding value to real estate and levering the hell out of it,” says one investor.
3. The missing key: When investors sign on to a fund, they are expecting the key men listed in the LPA to live up to the role and devote the majority of their time to the vehicle. Investors say a lot of key men will promise to spend just the “time necessary” on the fund, and that won’t cut it.
2. The fee defense: Investors and managers will always be debating fee issues, but it’s a GP’s justification for charging fees that can frustrate LPs. Investors want to hear more sophisticated reasons than just “our fees are reasonable because they are market” or “our management fees are just to cover our costs.”
1. The job offer: It’s no secret that many public real estate investment officials have been making the switch over to the private sector – Stuart Bernstein from the Texas Employees Retirement System and Tim Walsh from the New Jersey Division of Retirement being some of the most recent high-profile examples – but some investors say they have even witnessed “lightly veiled job offers to audience members” when GPs come to visit. That kind of audacity is not likely to score you a new hire, and certainly not a new commitment.