Quality limited partners will respect your boundaries on what you don’t share prior to their commitment to enter full due diligence on your fund.
Recently, in a first meeting with an institutional LP, I was asked “How are you exactly allocating the fund’s carry amongst the team?” I responded, “We would be happy to share important details on this and many other items when you have decided that our fund is a fit and you have entered into full due diligence.”
A slightly less direct response that I’ve used in previous instances was, “I don’t recall exactly. I will get back to you on this.” Then, in my follow-up email, I provided the first response.
I know what you are thinking: what if they need to know this to move forward and I really want this LP in my fund? Won’t this be viewed as evasive, hiding something, or just piss them off by not answering? If I knew the answer, why wouldn’t I just them tell them?
Can you remember going on a first date? What things did you converse about? Were you asking the other person about their dating history details? How much salary they made? What color of flowers they would like at your wedding? The detailed economic dynamics of your firm have considerable history and thought put into them and are not first meeting material. It is a distraction from your objective.
You might be thinking: in a dating scenario, there is typically a more equal power dynamic. With a “prospective LP meets fund manager” scenario, the LP has all of the power. In such a case, isn’t the customer/buyer, always right?
Well, if you feel that the LP has much more power in the relationship, then you’re going in with the wrong mindset. You’re offering a compelling product that may be immensely valuable to the LP (hopefully, you’ve done your homework ahead of time to confirm this.)
Remember that you, the fund manager, also have power. (This is a longer discussion to be addressed in a future article.)
Then why is the LP asking me this question? Often it is because they are a relatively junior representative of the institution and they are just curious (they don’t get paid carry J). More experienced LP representatives will be focusing on more important information in gathering information for their screening process. I’ve not yet experienced a LP who has been offended by my polite and reasonable boundary on a topic I’m not yet ready to get into.
As a LP shows more commitment to you by committing more resources to evaluate your fund, then it is appropriate to share more “internal details” with the LP.
Here are some additional topics to set boundaries on until a LP is committed to a full due diligence engagement on your fund:
- Details of GP commit contributions? Response: Our GP commit is [at least] x% which we believe is competitive and further demonstrates our skin-in-the-game. All the key persons are making personally significant contributions towards the GP commit. Happy to share the details if we get into full due diligence. [Note: if a substantive portion of the GP commit is coming from a 3rd party, then you would also want to indicate that as it might be an issue for the LP you’d want to know about.]
- Operating budget including salaries of GP team members? Response: We have a modest operating budget based on our modest management fees that aligns us with LPs. We have a detailed operating budget forecast including draws of partners that we are happy to share with you if we get into full due diligence. [Note: if this isn’t true, or if you have a higher than “standard” management fee, then you will need to be prepared to provide a bit more explanation.]
- GP principals dispute resolution details? Response: We have carefully thought about governance for our GP and have put in place terms to deal with situations such as a key person voluntarily or involuntarily not being able to fulfill commitments as well as dispute resolution mechanisms. We would be happy to share details once we have entered full due diligence for an investment commitment. [And then make sure that you have this in place!]
- Your fund model spreadsheet? Response: We have developed an extensive fund model that reflects our investment strategy. We would be happy to share the key assumptions in the model with you as a follow-up. The highlights are ___, ___ and ___. If we proceed to full due diligence, we’d be happy to walk you through our fund model details.
- MFNs for other LPs? Response: For LPs that make a significant investment commitment to the fund, we may discuss a MFN for certain terms in respect to LPs who commit at the same or lower levels. We’re happy to have this discussion once you have approval to make a specific commitment to our fund.
- Lower fees for us? Response: We have structured our modest fees to correspond with the budget we require to fund the right team and other resources to deliver or over delivery on the fund targets. So, likely the answer is that even with a very large commitment from you, we would not be able to give you lower fees.
This is not an exhaustive list. The point is that you want to focus the discussion on “fit”, with the LP ensuring that they understand your unique value proposition and how this can fulfill a need (“scratch an itch”) for them to invest due to the high potential of your fund.