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Things GPs say, probably believe, and what it means to LPs. Part I

Updated: Sep 3, 2019

Most GPs have probably tried this.


The pitch is off to a good start but then rapidly begins to deteriorate. The potential LP becomes less engaged, some might even literally roll their eyes, and possibly become argumentative.


There may be many reasons for this but a common one is use of “canned pitching” phrases.


Below are a few of my favorites.


Too keep it a snappy and speedy read I have broken it into two parts. So, stay tuned and keep an eye out for Part II – coming to a mailbox near you next week.


Strategy shift

“We have adapted our strategy to allow for / take advantage of changes in the market.”


More often than not, “strategy shifts” whether from minority to control or from large to small-cap etc. is an outcome of under-performance. If this is the driver, and not a cerebral highly macro-oriented, deliberate shift, this is evident from performance.


Markets change all the time and strategy should change to account for this. The best GPs adapt their strategy but have still outperformed in their prior funds. If this is not the case it is much better to turn the strategy shift into the outcome of "lessons learned" and how this will be applied going forward.


Competition I

“We don’t see much competition in our part of the market.”


Usually supported by a standard 2x2 matrix slide this will often depict a Widget focused fund in Liechtenstein surrounded only by “white space”. If this is such an attractive market why is it no one else is there, and what the H is a Widget?


While always looking to add differentiated managers this is not what is meant. In many cases LPs will actually have seen the competitors and will at the very least define the universe on their own.


Competition II

“We do run into them from time to time, but they are not very good.”


In this case GPs realize they have competitors. But their own track does not speak for itself or they are not quite able to articulate their own differentiation. Instead they default to disparaging their competitors and explaining their strategy and their performance.


This can potentially be quite a toe-curling moment. Probably the LP has met at least some of the competitors and knows the people, the strategy and the performance. Worst case, the LP might be invested with a competing GP that is now being subjected to a take-down. Focus on your own strategy and your own merits!


Leavers

“Almost none. Junior leavers have gone to B-school and the best will return. The senior leavers were by mutual agreement, it was amicable, and mostly related to personal reasons. Also, they were not really responsible for any deals, except a couple that did not do so well.”


Remarkably, not least in such an otherwise cutthroat industry, no one is ever simply fired. Can it be that GPs have uncovered the holy grail of hiring – probably not.


LPs expect GPs to have some turnover and ask mainly in regard to team stability and to understand why people leave. In fact, some turnover, also at more senior levels, is desirable. And careful, these things are very easy to confirm!


Operating partners

“We additionally have several Operating Partners who support us in sourcing, due diligence, and value added.”


This, more often than not, turns into a name dropping exercise. In India everyone seems to have Ratan Tata on speed dial and in China everyone is on WeChat with Jack Ma – how do they find time to focus on their own not so small businesses!


What do these people actually do, are they exclusive to the fund, what else do they do, how are they compensated, etc. Operating Partners don’t have to have name recognition but they do need to add value to the GP beyond a picture in the pitch book.


A few more coming in next week's post.


Stay illiquid!


Kasper


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1 Comment


Great article and helpful reading also for GPs. Would be interesting to know how many actually walk the talk during DD with potential LPs, hopefully there are more than just a few...

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