Top Questions LPs Ask Firms Before Investing in Their Fund

The challenges that investors and firms have faced in recent years make it natural for stakeholders to wonder about the state of our industry. The good news is that according to Pitchbook, venture capital fundraising in 2020 reached an all-time high of 14 U.S. VC mega-funds totaling $27 billion. That’s the largest total of capital and funds raised ever in one year. So, even in the face of a pandemic, the private equity investing industry grew.

However, to take advantage of this appetite for investment, you have to know the questions LPs ask firms before investing in a fund so that you can answer them clearly, concisely, and confidently. 

Team Capabilities in Private Equity Investing

One of the things LPs want to understand is a GP’s team capabilities. To learn about them, they tend to ask questions like:

  • What kind of performance have they delivered for past LPs? 
  • How consistent has that performance been over time?
  • What specific companies did they invest in?
  • Are they reporting performance based entirely on one single blockbuster?
  • Have they shown an ability to identify and nurture multiple solid winners?
  • What was their personal role in those investments (lead or just a bystander)?
  • What other professional and personal commitments do they have on their plate that might compete for their time and attention?
  • Can they take on new board seats in this new portfolio?
  • How connected and networked are they? How visible are they? Do they have access to the best founding teams? 
  • How good is their reputation in the community? What kinds of references can they provide from other LPs, founders, and VCs?
  • How diverse is the GP team? Do they bring different perspectives and complementary skills to the table?

Knowing the answers and replying promptly helps encourage them to continue their research.

Private Equity Investing Fund Design

Not surprisingly, another critical area of inquiry for LPs is fund design. Here, they typically ask:

  • What is the fee structure and carry (profit sharing percentage), and how does that compare to market norms?
  • What is the size of the fund?
  • What percentage of the fund is being personally invested by the GPs, so they have some skin in the game alongside LPs?
  • How many companies and how much diversification is the fund aiming for? 
  • What is the fund’s strategy for initial investment vs. total investment over time (and target percentage ownership of each company)?
  • Will the GPs make all the investments directly, or do they plan to employ “scouts” or other agents to represent them in some deals?
  • In what stage of the company will the fund invest (pre-seed, seed, angel, Series A, Series B, or later growth stages)?
  • What is the fund’s overall investment thesis? Does it intend to target a particular industry, sector, technology, market space, or other “theme”?
  • What are the criteria the GPs plan to use when evaluating companies?
  • Are there deal structures or terms that they will seek out or terms that they will not accept? 
  • What is the GP’s plan for reporting to LPs?
  • What performance benchmarks do the GPs consider relevant for the fund, and what is the team’s expectation in terms of overall performance they will be able to deliver?

If the fund design aligns with their private equity investing goals, they then move on to consider the big picture.

Fund Status and Current Investing Climate

The last group of questions LPs ask when researching private equity investing tend to be more general. For example, they may want to know:

  • Is this the GP’s first (or fifth or…) fund? 
  • How many prior funds are still actively investing (and requiring a lot of time), and how many are in harvest mode?
  • What is the GP’s current commitment level to those older funds?
  • How long has this particular fund been raising money? 
  • How much of this fund has actually been raised so far?
  • When does the fund expect to have a first close and start investing? 
  • Are there company investments already earmarked to be added to the fund at inception?
  • Are there special terms being offered to early “anchor” LPs willing to come into the first close and get the fundraising ball rolling? 
  • What is the fundraising climate right now, and are these competitive terms given the current environment? 
  • Who are the other LPs committed to the fund, and are any of them imposing special LP investment deal terms that are different from those you are offering me? And are any of them imposing special restrictions or constraints on the fund?

If an LP gets answers to the questions above that meet their expectations, they generally feel good about moving forward. And when you can field their queries and respond in a way that demonstrates you have a firm grasp on the details, that can seal the deal.

Enabling Exceptional Communication

In today’s private equity investing climate, LPs expect exceptional communication. To provide it, you need a holistic, industry-specific solution that enables superior relationship management. Because while an LP may not specifically ask you about your technology, they’ll know if you don’t have the right system in place!

To learn more about our private equity investing solutions that deliver faster fundraising, precise deal execution, and in-depth portfolio monitoring, request a demo.

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