How to woo an LP

Competition for capital remains fierce, with potential LPs more rigorous in their due diligence and more cautious than they have been in years. A sterling track record, a stable team and a differentiated strategy are now merely the price of admittance in the hunt for capital.

Snagging LPs and raising funds is more difficult than ever. “We had a market embracing risk in ‘13 and ‘14,” says Alan Pardee of Mercury Capital Advisors. “So if three guys left a big firm and talked about their record in a sector that made sense, those funds
were getting raised, but that’s harder today.”

GPs are responding with oldfashioned tactics such as referrals, conferences and placement agents, with the exact mix dictated by the type of new LPs they’re targeting.

If teams with strong records want more of the same kind of investors, they can forego an agent and rely on referrals and conferences. For GPs looking for LPs in new geographies, a placement agent is strongly suggested, along with an ample travel budget. For firms looking to diversify into more institutional investors, like insurance companies or public pension plans, advisors are a must.

Given that so many of these efforts are in person, an elevator pitch, laced with a few compelling facts, is a necessity. And two words of advice were repeated over and over again, no matter the situation: “Start early.”

“The best time to build relationships is when you’re not raising money,” says Aaron Rudberg of Baird Capital.

Rudberg explains that given the long term, illiquid nature of the asset class, investors want true, lasting partnerships and those don’t happen overnight. And a crowded marketplace only makes that process harder.

“For our most recent fund, we found a lot of LPs busy with re-ups so it was difficult for them to take resources away from that effort to forge new relationships,” says Kim Pedersen, senior director of investor relations for Frazier Healthcare Partners. “The longer they know you, the easier it is.”

Laura Fahrney of Ridgemont Equity Partners adds, “If you look at the several new LPs we secured, most were firms we met at least 18 months before. They followed us, and we kept them updated at an appropriate cadence. So by the time we began fundraising, it was a very streamlined process.”

“You just need to be meeting with people ahead of time,” says Jessica Brennan of The Carlyle Group. “Be proactive and be thoughtful of what kind of LP you do want to attract.”

Speed dating

Just how early to begin those initial conversations depends on the kind of LP a firm targets.

For high-performing GPs looking to expand a base of family offices or high net worth individuals, six or eight months might be enough to begin building new relationships. “For top quartile firms looking to diversify their LP base with more of the same kind of investors, you may not need an agent,” says Sunaina Sinha, a managing partner with placement agent Cebile Capital.

Experts suggest in this situation, relying on existing networks for introductions, along with attending relevant conferences, can do the trick.

But conferences can vary in stature and quality, and the rise of “speed dating” events to meet LPs has met with mixed reviews. Some GPs complain LPs send junior staff to attend these events, and it’s hard to make an impression when LPs see so many GPs in the space of a few hours. Of course, no one’s expecting to win a commitment after a 10-minute chat, but there is a sense that such events do not warrant the tens of thousands of dollars price.

Some GPs have found success with these speed-dating events though, at least in starting a conversation with new LPs. Ridgemont’s Fahrney spoke of attending a speed-dating event 18 months before launched some productive relationships, by offering a low-key way to introduce the firm. Most IR staffers stress that attending conferences as part of a panel is the preferred way to demonstrate a firm’s values and approach, and can help land a higher impact chat during a coffee break.

However, the most reliable way to snag a few more LPs can be tapping the existing investor base. “If your current LPs are happy, they’re among the best sources of information on how you’re perceived in the market, how you market yourself well, and what LPs might be interested in your fund,” says Michael Elio, a partner with StepStone.
Bonnie Harland of Pouschine Cook Capital Management found the same. “They’re happy to introduce you to other LPs and that grassroots approach has been more successful [than speed dating events],” she says.

For GPs looking to win first-time commitments in new geographies, the process is longer, more expensive and requires on the ground expertise. Firms should begin their “courtship phase” 12 to 18 months before official fundraising begins. And that phase often starts with hiring a placement agent or local advisor.

If GPs are looking far from home for new LPs, the right agent should have offices in the region of interest, but senior executives will still need to travel there on a regular basis. “Just like an East Coast GP might visit the West Coast six times in a year during a fundraise, you have to travel to Europe to foster relationships with European investors before you begin asking for commitments,” says Sinha.

She also stresses that firms should have patience when marketing in new geographies: “No one goes from zero to 100 [in a single fundraise]. Aim to get that first LP in the region, even if that means giving favorable terms to bring them aboard.”

Some foreign LPs are struggling to gain access to the premier funds, leaving them more willing to invest with smaller groups. “For example, some Asian investors have discovered that having money isn’t enough [for access to top funds],” says Elio. “So if you’ve got a unique angle and a strong, if not stellar, track record you may be more attractive in other markets, whereas most LPs in the US have their relationships set already.”

Tough road

Winning commitments from large institutional investors in the US might be the toughest road to travel. Experts suggest giving a minimum of two years to score first time commitments from a public pension or major insurance company. “It can take a few years to go from family offices to institutional investors,” says Sinha. “Visit their offices, invite them to yours, give them frequent updates and build the fund with terms that make it attractive to them.”

These large LPs often have strict investment terms, so adherence to best practices is non-negotiable. Placement agents are also vital, if for nothing more than intelligence on what an institutional LP might be looking for.

Winning new LPs begins with that first introduction to the fund, that three- to 10-minute elevator pitch to share over coffee or in that speed-dating session.

Building one requires distilling what makes a fund unique, which can be hard given LPs hear the same buzzwords from hundreds of GPs every year. “Be aware, there’s a good chance that 90 percent of the market might be saying the same thing you are,” says Elio.
Instead, GPs should research, often with a placement agent, what makes them distinctive, and bolster their case with a few key details. Ridgemont’s Fahrney explained that the firm often used a succinct two-page pitch before engaging in a formal meeting with their longer presentation “deck”. “No matter the length of the deck, it’s important to back your claims with the facts. For example, we know that everyone says they have ‘proprietary dealflow,’ but what exactly does that mean?”

Sourcing can be an ideal differentiator. “There’s only so many ways to buy, improve and sell an asset, but where a GP sources their deals speaks to their background and offers a chance to touch upon a case study or two,” says Elio.

So perhaps GPs should be grateful for the long courtship of new LPs. It doesn’t just give investors a chance to fully vet a fund, it gives GPs plenty of time to show LPs what’s special about their firm.

When to start courting investors before fundraising starts

Two years

A public pension or major insurance company

12 to 18 months

In a new region

Six to eight months

Expanding a base of family office or high net worth individual