Wafra’s experience since 2011 with debut and growth stage managers has led us to one key insight: LPs’ human resource constraints mean the pain of a low Return on Time (RoT) process may outweigh the promise of a high MOIC outcome. The younger the manager the more time it takes LPs to diligence them, and that matters even more than usual during covid-19. The amazing fundraising success of established platforms and the “flight to familiarity” since covid-19 is vivid demonstration of this.
But familiarity may also come at the cost of adaptation. As in other sectors, the most interesting transformation in private markets will likely come from challengers not incumbents. The British Private Equity and Venture Capital Association’s 2020 emerging manager barometer survey found 96 percent of LPs think there are advantages for emerging managers over more established funds. As covid-19 accelerates the pace of change within economies and society, many LPs will be looking for GPs with new investment strategies, business models and team cultures.
The challenge in this environment (and any other) is to help LPs with both sides of the ledger: provide a new and compelling proposition while doing everything you can to help LPs maximise their Return on Time. Here are four pieces of advice:
Be the change LPs want to see
LPs generally don’t invest more time or take more risk without good reason. The first hurdle will be proving you offer something they can’t get from the established GP market. We believe sector and segment specialisation offers the best way to differentiate and add value, particularly in sectors undergoing transformation. Many LPs would also welcome a more partnership-based culture with more LP-GP alignment, less hierarchical incentives structures, a commitment to ESG and more diverse teams.
Focus creatively on the deals
Great deals and great execution are scarce. While the large end of the market has become more competed, the mid and lower end remains relatively less efficient. While a large buyout manager needs a team of operational experts, a small team with proprietary deals can still drive value through origination – and so can still attract capital. It is far better to delay the formation of fund capital than it is to risk losing deals and, as a result, market credibility. More LPs now have directs expertise (or advisors) and so more deal-by-deal capital is available. Many LPs also like to use co-investment as part of their diligence process.
Be patient but persistent
No LP wants to act in haste: a 10-year fund is too long to repent at leisure. Despite the rise in data analytics, this remains a relationship business. But we see managers make interpretive errors on both sides of this fact: don’t create a false sense of urgency and pester the LP to breaking point; and don’t interpret “not now” as “never”. Successful fundraising requires a strategy to remind and inform, not just chase. Your route in matters too: LPs often respect the advice of existing GPs, and most LPs have a close circle of peers.
Find the right partner
There is a growing cohort of LPs who have the desire and ability to support new and growing managers, both through concentrated capital commitments, as well as becoming a thought-partner. In 2018 Wafra worked with trusted peers to form the Constellation platform: a global consortium of seven LPs working together to better access and support the future leaders in private markets. There are a few other specialist platforms as well.
Covid-related constraints on travel and face-to-face meetings have made it harder to build and expand new fund management businesses. However, starting and growing a new business has never been easy, and
the kinds of people who are willing to take significant career and financial risk to create something better are exactly the kinds of teams LPs want to find and support.
This article appears as part of Private Equity International’s December/January Deep Dive. Read it here.