February 29, 2016
Interviewed by: David Snow
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How to ‘Win’ Your Next Fundraise

With a larger number of GPs in the market, it becomes more difficult to stand out when trying to seal a deal. Experts from MVision Private Equity Advisers and Lime Rock Partners discuss the most effective ways of differentiating your firm to LPs.

With a larger number of GPs in the market, it becomes more difficult to stand out when trying to seal a deal. Experts from MVision Private Equity Advisers and Lime Rock Partners discuss the most effective ways of differentiating your firm to LPs.

How to “Win” Your Next Fundraise
The Importance of GP Branding

Matthew Malone, Privcap: Hi, Matt Malone from Privcap. Today, we’re talking about a subject that is important to any general partner looking to raise money in a very crowded market, and that’s differentiation. I’m joined by Kay Blackwell from MVision Private Equity Advisors and Gary Sernovitz of Lime Rock Partners, who have agreed to come and share their wisdom with us. I guess the first question is…sort of the macro question: how does a GP successfully get past the first meeting with a potential investor?

Kay Blackwell, MVision: I think that is difficult. There is a lot of competition these days from the market, increased number of GPs, and also with investors reducing their number of relationships. The key is really to be impactful early on in that first meeting and that is focusing on your value creation and your differentiation versus your peers. Also, ensuring that the LP has a good handle on you and the team and your cohesion as a team together.

Gary Sernovitz, Lime Rock Partners: Being in the mind of the LP and what the LP is getting pitched by email five or six times a day, in person, maybe one meeting a day and understanding what they’re looking for. This crosses private equity, hedge funds and other kinds of infrastructure investments. They’re really looking—from my experience over 12 years—for three things. We’ve talked about this. The first is the magic box: what is your system for creating alpha as an investor?

Second, they’re looking for private inputs into that magic box. For sector specialists, it’s relationships with entrepreneurs or understanding the business. Then, the third thing—and this is a bit difficult sometimes to actually quantitatively measure—is a durable hunger. They’re looking at you and want to make sure that your career, your livelihood—everything is on the line with this next fund that they’re going to be risking their career and their institution’s capital on.

Malone: Are you seeing repeated mistakes perhaps that GPs make when they first make these presentations or have an introduction?

Blackwell: A lot of GPs don’t really examine and interrogate their investment process. They take it as a given. They’re in it every day, they’re executing it, so I think the key is to really step back and take a look at—as Gary said—the inputs into that process. The LP is looking to see that the alpha is hardwired into your investment process.

So, in terms of the mistakes, I think it’s being too generic—thinking that the advantages of the private equity asset class are advantages for your investment strategy. It’s referring to your investment strategy in generic terms—that all other GPs use. One mistake we hear a lot is, “We’re smarter than everybody else,” or “We like to think we’re smarter than everybody else.” That would be a red flag for an LP.

Malone: Gary, one of the things we’ve discussed before is that a sector-specific strategy or orientation in and of itself is not a point of differentiation, right? You come from a sector-specific energy fund, so how do you approach that? In a world of other energy funds, how do you prove you’re the best or the fund worth investing in?

Sernovitz: It goes back to things Kay said—just ignore that you’re a sector-specific fund. It’s similar to a generalist private equity fund whose pitch is, “We’re a private equity fund”—a sector fund…it’s that same trap that you can fall into. Everyone wants to talk about oil and gas. Everyone wants to talk about $29-a-barrel oil. So, one of the issues you get into is to end up talking about oil and gas for three quarters of meeting, then the last quarter of a meeting it’s like, “We’re actually a specific private equity fund with a specific magic box and private inputs,” and all that kind of stuff that you don’t get to. Part of what we try to do in a meeting is make sure—let’s talk about us before we talk about the sector specific and let’s ignore the advantage or disadvantage being a sector specialist will bring you because, frankly, at least in energy, we’re talking to people who deal only, for the most part, with energy-sector funds.

Malone: When you have a GP who is in the process of doing deals, earning their returns and aren’t necessarily stepping back and looking at the process holistically, how does a GP effectively gather than information and then articulate it to a perspective investor?

Blackwell: We do a lot of working sessions with our GPs where we will do that process of examination and interrogation with them. It’s really drilling down into their DNA, what they feel differentiates themselves in the markets and looking at their investment process every step of the way. Then, looking at, very specifically, how that forms the value-creation process. LPs are looking for consistent, systematic and repeatable value creation.

Malone: Are you finding there are, at least today, specific questions that LPs appear to be more focused on than perhaps they were in the past?

Blackwell: We have very specific questions on what you did to create value in this investment. The investors are looking for properly articulated points and then, the demonstrable value from that.

In terms of the past, what I would say is more prevalent now is really digging down into the teams and into the junior layers. So, interviews with all the team members, plus the support, looking at the infrastructure, then also looking at economics and succession planning in the GP to ensure you’ve got a stable team.

Sernovitz: Right now is sort of downside protection, loss minimization—all that sort of stuff.  We have a lot of zero—well, not zeros, but below 1x [IRR ?] ideal funds in here. How do we avoid that?

Then, the second is, on the numbers and try to dig down to find that demonstrable alpha. So many things you didn’t predict, good and bad, happen in deals that just follow from an initial investment-committee memo to the end of the deal. It’s not a straight—one out of every five deals is just a straight shot that this did happen or didn’t happen and you can demonstrate it.

That’s not solved by data volume, unfortunately. It’s probably solved by understanding a little bit more of the randomness of Wall Street sometimes in investing, and the more real-life factors.

Malone: We’ve talked a bit about the introspection of a firm being able to assess its own strengths and its own processes. Have you seen things that your GPs have done that have been particularly compelling when presenting those sorts of data points?

Blackwell: Yeah, absolutely. I think, as with anything, knowing your competition is key. LPs do expect you to know broad competition and then, very specifically, who plays in the same space and has the same kind of mindset for investment philosophy as you do. They will often ask you, “What about ‘X’? or a group of managers. As with everything, be very specific.

Something that I’ve seen work very well, and this is verbally, was a very systematic takedown effectively of the competition in response to an LP question like that. It basically eviscerated any thought on the behalf of the LP as to whether they would invest with anyone but this GP.

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