September 29, 2014
Interviewed by: David Snow
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It’s Not You, It’s Them

Privcap presents reason No. 3: “It’s Not You, It’s Them.” Although GPs may try their hardest to woo an LP, they may get passed over for reasons that they shouldn’t take personally. Our panel of experts from MVision, StepStone and Zurich Alternative talk about why GPs should listen to the adage “it’s not you, it’s them.” Part 3 of a 5-part video series.

Privcap presents reason No. 3: “It’s Not You, It’s Them.” Although GPs may try their hardest to woo an LP, they may get passed over for reasons that they shouldn’t take personally. Our panel of experts from MVision, StepStone and Zurich Alternative talk about why GPs should listen to the adage “it’s not you, it’s them.” Part 3 of a 5-part video series.

It’s Not You, It’s Them
Five Reasons Why You Won’t Raise Your Next Fund

David Snow, Privcap: Today, we’re joined by Michael Elio of StepStone, Moose Guen of MVision Private Equity Advisors, and William Chu of Zurich Alternative Asset Management. Gentlemen, welcome to Privcap. Thanks for being here.

Unison: Thank you.

Snow: We are talking about fundraising and about reasons why an LP may not invest in your next fund. All of you are fundraising experts, so I’m fascinated to hear your views. Let’s talk about Reason #3 why you might not raise your next fund and that is, “It’s not you, it’s them.” In that sentence, “you” means you, the GP, and “them” means the LPs. A classic break-up line, of course—“It’s not you, it’s me.” In the realm of private equity, there could be reasons that, despite your strong track record, an LP nevertheless can’t take any more of what you have to offer, despite your many merits into the institutional portfolio. Mike, can you paint some scenarios for why that would be the case?

Michael Elio, StepStone: There are quite a few reasons. It’s interesting in this world of “the client is never wrong,” or the LP is never wrong, but in this particular case, it rings true. Different LPs have different mandates and different places where they want to invest their money. A lot of GPs come through their door. We met with 750 last year alone. We do not have mandates for every GP that comes in the door. We also don’t have mandates for every great GP that comes in the door. If an LP is not looking for that type of investment, it’s just not a fit. So, in that case, you’re correct: it’s not you, it’s them.

Snow: It must be frustrating as a professional fundraiser that—even if a GP has a stellar track record and is going after an incredible opportunity—if the LP doesn’t want that opportunity or is over-allocated to that opportunity, they simply have to pass, correct?

Moose Guen, MVisionWhen the programs began 25 or 30 years ago with the investors, they would go and invest in great stories, and they could have up to 150 GP relations. But, as the reporting became more dense and the process became more intense, it became very difficult to manage all these relationships. On the whole, there is this aspect of concentration. As a result, that very much limits the shots. One aspect we want to try to get across to general partners when we bring them to market is, don’t waste your bullets. Because if for some reason there’s a miscommunication or your timing is a bit off, you could find yourself in a very dense market. 

Snow: So, even if you came to market with a great team, a great track record, LPs are all full up—

Guen: They’re full up, right? And here’s an interesting point: we came across another very good, large-cap oriented GP in that region and we told them, “Sit it out for nine months. Figure out how you can stretch it out a bit, so that all these people will be finished and you’ll be one of the very few in that year.” Because one of the things the investors do is they have vintage-year allocations. So, all in all, you’ve got a portfolio that can be anywhere from six to 12 relationships in that particular zone. Then, if you’ve got a phenomenal track record, I’m good. The problem is his track record is excellent but unless his track record is incredibly excellent, I’m fine.

Snow: William, it takes quite a bit of discipline to be wooed by a great GP story or great market opportunity, yet know you’re already allocated to that strategy and say that you have to pass.

William Chu, Zurich Alternative Asset Management: Yes, it’s a tough position that LPs are in. Unfortunately, I wish all LPs were right. I know I’m not right 100% of the time (far from it), but those are tough decisions that we have to make when we underwrite a particular manager and go with that particular manager. You have to look at and understand the situation that the LP faces. I think the trailblazers are the Canadians. They were the first to make a very strong move into co-investing, directly or alongside general partners and secondaries, either directly themselves or through partnerships with various different secondary funds. You have this total pie called private equity and what used to be 100% of a pie for primaries, of course, some of that has to be sliced off for those co-investments and secondaries. That continues to happen and actually is happening at a much more rapidly developing pace, particularly in the U.S., with a lot of the larger LPs as it relates to co-investing and secondary. Don’t be surprised that limited partners, more likely than not, will have to pass on some of their managers. The other piece to it is about allocations, right? The challenge that a lot of general partners have, particularly those that have been successful, is that you want to give a slice of your fund to everyone and anyone that could be value to you longer term, but by the same token, the LPs have to manage a certain number of relationships. You can’t have a staff of four, eight or 10 managing over 200 partnerships.

Elio: One thing GPs probably need to understand, which you both touched on, is that allocations are changing and the days of LPs being a homogenous, primary commitment lot are gone, right? They’re committing to co-investments, secondaries. They’re not bucket fillers anymore. In this changing market, they also change teams. At the macro level, the CIO is putting different types of investments under different teams, so the GP should not only make sure that—maybe they got “no” from the private equity team, but actually their credit is being handled by the hedge fund team.

Chu: If I could just add to what Mike is saying, the job responsibility for some of the LPs is—if I can pick one slice of the LP universe—the endowments. Their individuals are more focused across alternatives. It isn’t just private equity or hedge funds or real estate. Again, as a result of that, in the totality of your alternatives pool, something has to give and sometimes it is coming out of the private equity pool.

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