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.

A traditional crm was built for general ‘customer’ scenarios

Software platforms have made the world a better place by making work a better place. Indeed the world is better off when people enjoy their jobs even marginally more, and workplace applications on big CRM platforms like Salesforce.com have done that and much more.

But the potential that platforms like these offer presents diminishing returns: once the platform provider has engineered too many industry specific components into its platform, its usefulness for other industries begins to be threatened, and with that so do the usefulness of the component tools built into the platform.

So it is with the CRM category that Salesforce.com has defined: it is generic enough to work for many industries, and yet still offers the potential for others to round off the edges and nail more vertically-oriented and extremely tailored software solutions.

Private capital markets are actually a great demonstration of this dynamic. Where generic CRM platforms simplify — appropriately so — to assume there’s a business, a customer, a sale, and service of that customer, there are a few industry-specific pieces that are missing.

Take for example, that investors become customers by investing through legal entities the GP raises. It’s a subtle but important nuance that just doesn’t make sense at a platform-as-a-service level (because it’s overly complicated for a simple one-time sale that many industries require), but which can easily be added without 10 years or software engineering. Once provided, the rest of the platform’s components become tremendously powerful again and you’re set to take over the world.

As a traditional CRM in our pillars methodology, these nuances must be present to properly account for investors in these legal entities, potential target companies and which are owned by these entities, the context of all interactions with these parties (as well as the appropriate overlap, ie co-investments), and how you’re arriving at finding these opportunities on both sides of the equation, such that you’re able to piece together what’s effective and what’s not. Not just because we say so, but because these are the very relationships and data that are key to the motivation behind a CRM in any industry.

It’s critical, too, that the valuable publicly-available information that helps to enrich CRM systems and save users painful steps of entering it themselves is fully-integrated at the platform level.

Again, look no further than the 3,000+ pre-built integrations that Salesforce.com — the creator of the CRM platform concept — has at a platform level to do so, and which only exists by way of holding just short of overly-specifying certain industry workflows that would present challenges to properly integrate.

Stakeholder reporting and communication (investor relations) draws on a range of datasets

The traditional “customer service” model of CRM systems once again makes overly-simplified assumptions about the customer relationship when applied to private capital markets.

In fifteen years I personally have yet to hear the terms “warranty” or “service call” in this market because it’s just not the same. But make no mistake, as uncomfortable as it may be to say aloud, customer service is more important now than ever and it’s constantly happening; the industry is, after all, considered to be a financial “service”.

As it turns out, that service is primarily information-based — it’s driven by data and takes the form of reports and analysis that drive decisions, and then end up again in investor-facing reports and analysis.

The foundational elements of a private capital markets CRM must be built such that they accommodate this data (like we discussed above), but so too that it can accommodate additional supporting data that investors (customers!) need in the context of service.

Oftentimes this supporting data — financial metrics and time-based values, for example — is believed not to meet the traditional definition of CRM and the natural thought is “well, better do this in Excel!”.

While I happen to believe Excel is still the greatest software application ever built, its introduction to this value chain we’ve discussed herein actually creates the problem many firms suffer from: key data needed to provide customer service (again: effectively the entirety of a firm’s reports and analysis) is now in disparate systems and detached.

Both of those dynamics are important and distinct: not only is this supplemental data disparate, but when brought together there is no logical association that can be made between the two data sets.

Allow me, then, to make the point very simply: not only can this financial and time-based value data (you may be thinking about is as “portfolio monitoring” or “accounting”) be a part of a CRM, it is arguably the most important part of a CRM because it’s at the core of what providing service to the customer entails — information that comes out of data!

Firms need a digital method to engage stakeholders (ie investor portals)

Investor portals are not new; in fact, for many of us — including myself — they conjure up horrifying nightmares in which we’re aimlessly guessing at folders to find the newest document we need.

So in lies the opportunity: not only have the portals we’ve come to hate not simplified the process of acquiring information, they’ve failed to create an entirely new experience that is “customer service” driven.

To be fair, this is not a B2C market where you’d be long out of business for not having focused on customer service and thus the customer’s technology-driven experience. But don’t expect to be around too much longer if you aren’t thinking about this shift.

Today’s institutional investors increasingly expect this same consumer-like experience, and a massive opportunity is being missed by not providing it. It’s not about providing them the experience they desire; it’s more about the ability to measure engagement that is had in return.

Put simply: what’s keeping the market from providing this experience is the availability of the information that’s required to create the service that provides the experience.

If you’ve hung in this long, you know that by focusing on your CRM, you have the data that’s required to manage the customer relationship and the technology-driven experience through which that information is shared to create a differentiated and opportunistic customer experience.

investor relations