Would a GP accept any LP as an investor?
I'm not very familiar with PE. But I was wondering, would a GP at anytime during fundraising reject an LP as an investor? ex. a Pension Fund. I understand the elements LP's are looking for when investing in a GP, but what about the other way around?
If yes, for what reasons? Or is all money generally accepted?
Thanks
Only reasons that immediately come to mind are if 1) the fund is oversubscribed 2) the LP can't/won't meet the minimum investment amount or 3) the LP has some egregious diligence requirements and the GP doesn't want to deal with it.
Thanks - That makes sense.
A different way of asking; How would you asses if an LP is a good fit for your fund? Investment strategy? or?
This would be my answer as well. That's the point of the "limited" part in LP - they're just supposed to be a source of capital. I can think of maybe a few odd exceptions to this but don't think they're really relevant as it mostly involves the LP making some kind of excessive demands that the GP just doesn't want to deal with (e.g. if it's like a teacher's pension that wants a weird side-letter arrangement that makes sure their capital isn't deployed into a "sin" investment or a gun company or something).
From what I've seen this summer working for an LP is that its more common for people not to get the amount of capital they requested if the fund is oversubscribed. But sometimes a fund doesn't want to increase their fund size too dramatically so an LP who doesn't already have a relationship with the fund might be locked out.
While it's an easy joke, it's a bit naive to say that as long as the LP has the money the GP will accept it.
Quick reasons that come to mind why that may not always be the case:
1) Reputational risk: This applies primarily among the family office world. For instance, there's times where the GP may not be the classic PE fund you're thinking of but a single family (or maybe a few late-career guys who've spent a couple decades working together) that bolsters their own investment capital with some LPs who are other families they know. If there's a family with a potentially illicit or particularly opaque source of wealth, you might decline them as a Limited in your fund because you don't want to get drawn into anything untoward. (I've seen this where a Nigerian guy had what looked to be some less-than-clean money and it got caught in counter-diligence; didn't let him in.)
2) Legal risk: Some LPs are known to be particularly litigious. This can happen in the back end of a fund's lifecycle where they're anxious to get distributions or want to agitate for a change within the GP entity or in the fund's terms. The overwhelming majority of LPs know not to do this because reputations are sticky and if you're known to be feisty or combative, the big guys (Blackstones/Carlyles/Thoma Bravos) won't let you in. Some (often foreign) don't, though, and they're known.
3) Side letters: You'll see this primarily in the E&F space, where the charitable entity affiliated with a religious organization will have specific requirements for its capital along ESG, DBL/TBL, or 'sin' clauses. In plain English, they have mandates that either prevent their money from going into something that's bad for the environment or people (certain energy projects, weapons, chemicals, or countries) or forces that it go into things that are positive by whatever yardstick they choose. This can be a headache for the GP. Yes, the obvious example is some great gun manufacturer that you think you can get a new procurement contract for that will triple revenue, but it runs deeper than that. It might be that you're an enterprise software investor (Insight, Vista, Thoma Bravo, etc.) looking at a cyber-sec deal but find that the largest clients are foreign militaries or various defense contractors. If you have a side letter exempting warfare, you now have a huge headache changing your capital call and investment allocation mechanics to accommodate the LP who has the clause.
4) Personal vendetta: This actually happens the most often out of all I've listed. Investors are humans just like any other. They carry grudges. Some guy might have a long memory and remember a time where one guy on the LP team dicked him over somehow (in high school, college, at a prior employer, perhaps at a different fund, who knows), and because of that, he's not letting him into the fund.
What I'm trying to say is that just showing up with money, even to a fund that isn't oversubscribed, isn't a guaranteed ticket in. That's too reductive a viewpoint, it can be more nuanced and I hope this post helps illustrate how.
Thank a lot. Just what I was looking for.
What about the other way around? Are there any difference in benefits to having lets say a top tier pension fund to a asset manager or a lesser known pension fund as an LP? Other than increased reputation which I assume you can leverage to get other investors.
The primary benefit of securing a commitment from a brand-name, reputable LP is that it aids your future fundraising.
If you get OTPP, you can tell everyone else in your process you have them. All the other big guys know how robust their diligence is, so you'll get some quicker commitments because (i) some people look at a top-tier LP commitment and immediately rubber-stamp you as properly vetted, (ii) other LPs who are mutual investors in other funds alongside OTPP can ask connections there to share diligence to shorten their own process, (iii) some people are just lazy assholes who wait to see who commits and then rushes to be last one in.
Also, once you have a massive name like that, you know that as long as you perform in the upper quartile, you're on the trajectory of doubling your fund size every fund. LP commitments are sticky. Once they have you, they want to keep feeding you more. If they start with a $100m commitment to your $1b fund, they want to see you out raising $3b for the next so they can put $250 into it. The motive there is two-fold: they want to deploy a larger check and also see it be a lower percentage of your overall AUM (thus avoiding concentration risk).
It could also just come down to something as simple as the LP's sophistication or understanding of the strategy/sector the GP is investing in. If the GP senses the LP has no idea what they are doing, the LP is investing a very small amount and will be a pain in the @$$, then a GP might not want to deal with that over 8-10 years of the fund. You're not just getting their capital, you're entering a partnership, therefore a few million dollars might not equate to a desirable relationship.
Quia non praesentium et aliquid ipsum dolores. Earum atque at voluptas exercitationem.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...