Making LP Feedback Less Elusive
Ask A CIO #25
It was widely expected, but it’s now official – come January 20th, Gary Gensler will step down as the Securities and Exchange Commission Chair. It’ll be interesting to see how far (or not) the next SEC Commissioner goes in pulling back the regulatory reach and scope of the SEC under Gensler’s tenure.
I built my career in the largely unregulated, untaxed world of endowment and foundation investing. Here at Ivy Invest, we manage a 40 Act closed-end interval fund. Let’s just say I now have a far greater appreciation for all that it takes to operate within the SEC’s purview. It’s given me a different perspective and greater empathy for the challenges that managers face.
This week’s question is specific to emerging managers, but I think the challenge of institutional LP feedback is relevant for managers of all sizes.
(Before we dive in, just a quick note that I won’t be writing next week, so I’m wishing you all an early happy Thanksgiving! Ok, on to the question.)
How can emerging managers more effectively gather feedback from prospective institutional LPs, particularly after an LP has declined to invest?
Ooh, this is a tricky one.
In some earlier advice for emerging managers, I noted that many emerging managers start out at more established firms. For those managers, I recommended getting to know institutional LPs prior to spinning out.1 Getting to know LPs earlier provides more opportunities to build familiarity and trust. And it goes without saying, but the more trust in the GP/LP relationship, the more forthcoming an LP is likely to be with specific, non-generic feedback.
Which brings me to the first major challenge in acquiring feedback. Almost every institutional LP I know has a story about providing feedback that later backfired (no good deed goes unpunished). For many LPs, the easiest feedback therefore defaults to a generic decline, or admittedly, no response at all.
The only way around this default setting is to be clear in understanding that when an LP declines to invest, there’s no room for negotiation. Asking for feedback cannot be an opening gambit into persuading the LP to reconsider. There’s no guarantee of success, but if a GP can establish that a request for feedback is standalone with no other goals, LPs are generally more willing to provide at least some additional specifics.2
The second major challenge is purely logistical – LPs decline to invest far more often than they say yes. There realistically aren’t enough hours in the day to provide fulsome feedback to every potential GP. To the extent that a manager can find opportunities to gather feedback in real time, during a meeting, LPs may be more willing to share.3
As a side note, it can also be easier to gather clear and transparent feedback from an LP outside the fundraising process. Finding an LP willing to be an objective sounding board can reveal a lot of generally useful insights. It would be helpful to learn, for instance, is the presentation clear? Or, how does this strategy compare to others in the market? Or, where might LPs consider this investment from an allocation perspective?4
To wrap up, I’ll add a question that wasn’t asked, but that I’m going to answer anyway. While we’re on the topic, what kind of feedback should a GP ask for from existing LPs, but often doesn’t?
Here I would point to a disconnect that I occasionally observe. As I’ve noted before, institutional LPs have wide views into markets and generally have perspectives on the landscapes for various strategies. These perspectives naturally include opinions on GP competitive strengths and core competencies. Existing LPs almost certainly have an opinion on what differentiates a GP from its peers. And sometimes, these opinions don’t necessarily line up with a GP’s assessment of itself.
I think of the above more as a potential missed opportunity than anything else. I imagine some GPs might be surprised by some existing LP responses, and mismatches could provide insight into how a GP could improve its message to future prospective LPs.
Thanks for joining this week, and as always, reach out to askacio@ivyinvest.co!
Happy early Thanksgiving!
Wendy
There’s also an element of practicality here for emerging managers that may have non-solicit agreements as part of their contracts with prior firms. These agreements generally don’t preclude LPs from reaching out to the emerging manager post spinout (purely from my experience, definitely not legal advice).
This is not to say that GPs shouldn’t revisit LPs that have declined, but give it time. Maybe wait until the next fundraise for the next vintage year fund, or at least 6 to 12 months. Distribution lists that provide periodic updates are a perfectly acceptable way to stay in touch in the meantime.
Just to be clear, real-time feedback is more about understanding the parameters for where the LP typically invests. Asking, for example, about the LP’s typical investment sizing, typical expectations for a manager’s minimum AUM or track record, etc.
I realize that this suggestion presumes a GP has existing friendly, trusted relationships with LPs. For an emerging manager, this may not yet be a realistic option.
This article does not constitute an offer to sell, nor a solicitation of an offer to buy the Fund.