Raising capital from Institutional LPs — a summary of our panel discussion
Rajat Chopra. 14 December 2022. On behalf of AccelNorth Partners.
AccelNorth Partners (ANP) partnered with Vauban from Carta to co-host ‘Intuition from Institutional Investors’: a webinar aimed at democratising the understanding of institutional fundraising for emerging GPs in particular. We were joined by some of the top LPs in Europe/UK who are open to backing emerging managers as our panellists (thank you to them!) — European Investment Fund (EIF), British Business Bank, AXA Venture Partners (AVP), and LGT Capital Partners — who provided key insights into what they look for when considering investing in VC and PE funds (both emerging and established), their pet peeves and some key reasons why GPs fail LP due diligence.
Our key take-aways from the webinar (representing the views of the LPs who joined us, or a subsect thereof):
1. The definition of emerging managers is a function of two components — (1) GPs raising their 1st/ 2nd / 3rd fund i.e. GPs raising fund 4 and above are treated as established managers, and/or (2) GPs with a strategy focused on emerging markets.
2. Despite the macroeconomic and political uncertainty, the LPs who joined us maintained a positive outlook and commitment towards private markets investing (both existing and new relationships). Especially for government backed institutional LPs, it is clear that they would not stop supporting the asset class, including emerging managers.
3. The LPs on the panel recognised that 2022 and 2023 are likely to be good private markets vintages. ANP conducted an analysis which also shows that the crisis and post-crisis vintage returns have generally outperformed immediate pre-crisis vintage returns. Reach out to us, if of interest, to get a copy.
4. For LPs, more than a preference between Buyout and VC, they are focussed on identifying GPs who can deliver alpha; they are looking for what experience GPs have historically in navigating market volatility, difficult cash use decisions, down rounds, etc.
5. All the LPs present said that they would take a first meeting, even if just to get to know the GP or for market intelligence, but they reject a very high percentage at that point. (more on why below)
6. Some notable LP pet-peeves or common mistakes by GPs while pitching:
a. GPs are under-prepared: they fail to do their homework on LPs before coming to pitch. Learn about LPs’ programme/product offering, do reference calls, and ask interesting questions in the meeting.
b. At the other extreme, GPs trying to force-fit themselves to an LP’s bucket, where the fit is marginal at best. Talk about what you do and what differentiation you bring to the LP’s portfolio — if LP wants to support you, they will make it work for you.
c. GPs’ lack an understanding of what institutional LPs need to take their investment case to the committee. Be patient and do not expect the LP to sign a term-sheet right after the first meeting.
d. Lack of transparency of track-record. (more on this below)
7. Key reasons why GPs (especially emerging managers) fail LP due diligence:
a. Emerging managers fail to communicate their differentiation, and why they believe that they will be able to outperform their peers: GPs need to convince LPs why they are additive to the LP’s portfolio and to the ecosystem. Emerging VCs also need to convince LPs why great founders will take their money vs other GPs who are also competing for access.
b. Structuring ‘basics’: are they domiciled correctly, do they have the correct terms, do they have an acceptable team incentive structure in place, are conflicts appropriately flagged and managed, etc.
c. First-time teams are difficult to back, but first-time funds are not i.e. the founders of the GP should have worked together in the past, even if under a different structure or part of a broader team. One LP commented that their statistics show that first time teams break up more often than not.
d. Lack of team track-record: in case of no track record, work with your team on the strategy and build a track record on a deal-by-deal basis. LPs needs some proof of the GP’s investing skill-set. Not having an exit is okay, however in case you have an exit (cherry on the cake!) it needs to be relevant to the strategy of your fund to make it count.
e. GPs lack fund management skills, which can easily impact their gross to net spread: calling additional capital, not utilising credit revolvers, non-efficient utilisation of reserves, investing good money after bad etc.
f. GPs need to have skin in the game and their interests need to be aligned with LPs’. However there needs to be a balance i.e. GPs can’t have a majority of its wealth tied as fund commitment (makes them risk-off), nor should only one of the founders of the GP provide the majority of the commitment.
8. LPs are willing to support GPs entering new sectors provided the new sector/strategy is differentiated enough and has a dedicated/specialist team. In addition, LPs are willing to take a risk on “new innovative ways of investing” within an existing sector as against a new way of investing in a new sector (which is a double risk proposition).
9. ESG and D&I are, and continue to become, very important, even for VCs: (1) ESG is a reporting tool for LPs, and not a strategy (although Impact investing can be), and (2) having a female non-executive partner or IR is not sufficient for diversity.
To find out more about how institutional investors evaluate fund managers, and how best to optimise your institutional fundraising process, feel free to reach out to us.
AccelNorth Partners is an advisor specialising in the private markets industry. Whether you’re a GP or an LP, reach out to us to discuss your strategic, operational, diligence, fundraising and IR challenges. Email us at info@accelnorthpartners.com. And follow us on Medium.
