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

Updated: Sep 3, 2019

Following on from last week’s post here is Part II of my favourite “canned pitching” phrases.


Team composition

“Our team is comprised of high performers, mainly from (insert bulge bracket name) investment bank and / or strategy consultant.”


While having spent time in these places certainly says something about stamina and above average smarts it does not automatically qualify someone as a GP let alone an investible GP.

Skill-sets from these places can be highly relevant, but LPs like to see people who have actually run and can run business and not just optimize them in PPT or Excel.


Reality is much harder than theory and raising and running money requires more than pretty PowerPoints and good story telling.


Deal flow

“We don’t like auctions, we prefer focusing on proprietary deal flow and track deals for a long time prior to investing. This allows us to build a personal relationship, have an angle, and add value from day one.”


Who is it that actually participates in auctions? Seemingly no one. And if they do, it is always a limited auction, and what does that exactly mean. What does it say about the entrepreneur, that is being kept on as CEO because he is critical to the business, that he does not want an intermediated process?


LPs don’t, or at least should not, care about the source. What matters are the multiples that are generated and for most LPs this is a simple and standard piece of analysis.


Valuations

“We are able to buy at cheaper valuations (than average).”


This is somewhat in line with deal flow. Is anyone actually buying at above average valuations? Also, it is not about buying cheap but about buying well.


Anyone can buy a piece of s… and it is at least hopefully cheap. It is much harder to buy something “right”, do something with it, and then sell it at a higher valuation.


Value added

Post investment we look to add value to the company”


Although value in an investment can be created in multiple ways, adding value by growing the company and / or making it more efficient post-investment is actually the point!


Unfortunately it is in many cases also easier said than done. All managers say this but not nearly as many can actually illustrate this in their track and with concrete points. Most LPs don’t really buy “we helped with strategy and sit on the board” as a type of value add.


Exits

“We target three types of exits for our investments: IPO, Trade sale, and Secondary.”


This is the point where even the most patient LP will roll her eyes. When asking about how a GP thinks about exits what is meant is: “how do you plan for it and how do you actually get there”.


Don’t forget the fourth exit options, which most GPs seem unacquainted with and completely leave out– bankruptcy, which is actually quite legitimate.


First quartile

“We are in the first quartile.”


However mathematically impossible this actually is, seemingly all GPs are in the 1st quartile. Mostly this is accomplished in one of two ways. By finely selecting which deals to include – this is where there is a “strategy shift” or the leavers get blamed for the deals gone bad. Or by slicing and dicing the universe until it fits – this brings us back to the Widget focused fund in Liechtenstein from last week’s post, which almost is guaranteed to be 1st quartile.


Benchmarking is at best somewhat flawed, more on that in another post, but besides this most LPs will define the universe, do their own benchmarking, and often have ample data to make direct comparison within their own portfolios.


For the GPs reading this, there will be another post on “What LPs say and probably believe”. It is also worth bearing in mind that many LPs have long institutional memories. In many cases they take copious notes, and can often go back at look at even very ancient pitch books that you may happily have forgotten about.


What are your favourites? Leave them in the comments.


Stay illiquid!


Kasper


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