Five Tips GPs Should Consider When Fundraising

Sheryl Schwartz knows a thing or two about what LPs are looking for in their PE investments.

For 13 years, Schwartz was head of alternative investments at TIAA-CREF, which has more than $426 billion in combined assets under management. She was responsible for all fund, direct PE co-investment and mezzanine debt opportunities sourced from TIAA’s relationships with fund managers.

Earlier this year, Schwartz joined Perseus, a Washington D.C. private equity firm, where she’s a senior MD working on mezzanine debt and private equity investments. While she’s now a GP, Schwartz still has an idea what LPs are looking for in their investments.

Different LPs have different priorities, she says. Some are looking for distributions while others want high returns, strong multiples and to generate capital gains. “Some LPs want the money to go out quickly because they want to increase their exposure,” Schwartz says. “Other LPs are the opposite and want [the funds back] over time. They want to manage their exposure.”

Fundraising in 2010 has been difficult. Still, some firms are currently marketing and other expect to go out next year. Here are some tips from Schwartz to help GPs in the fundraising hunt:

  1. If you are rejected, don’t go above or around the LP who made the decision. Don’t go to other LPs at the same firm to get an explanation of why you were rejected, Schwartz says. Try to take a big picture view, she says. Just because you got rejected now doesn’t mean you will in the future. Seeking out other LPs at the same firm to “explore” your situation will just cause bad feelings and this could have long-term consequences, she says. “You want to build a relationship,” Schwartz says. “The LP may turn you down with this fund but they may go into the next fund. Think long-term.”
  2. When talking to an LP, don’t fudge anything. Try to be as truthful as possible about: the status of your investors; your track record; valuations; who can take credit for contributions for each deal; who was the lead on a transaction; whether a deal was truly proprietary or a auction; and, fees. Why? Because the LP will conduct due diligence and verify what you say, Schwartz says. “Be straight. You’re building a partnership and a relationship and you want it to be built on mutual trust.”
  3. Manage your exits/distributions carefully to maximize value and do it in timely basis. LPs like to see that the earlier funds they committed to are doing well. Any cash back, however they get it, is good, she says. This includes dividend recaps. The LPs and GPs see such transactions in same way, Schwartz says. “If the GP likes it, then the LP generally likes it as well,” she says.
  4. Be careful about too much turnover of junior staff. Senior staff sometime thinks that if they stick around, it doesn’t matter if a significant number of junior people leave a firm. This is untrue, Schwartz says. LPs want a team with “depth and breadth,” she says. Because funds are typically 10 to 15 years in length, LPs care if a lot of junior people are leaving.
  5. Handle your bad situations. LPs like to see that GPs take measures to address a “bad situation,” like declining performance, at their portfolio companies. If a company does get into trouble, GPs shouldn’t write off the loss but address the situation, Schwartz says. This could include restructuring the company, providing DIP financing or replacing management, she says. “It might still be a loss but they should minimize the loss,” Schwartz says.