Tim Wegener has spent more than 15 years in private equity, both as an LP and as an equity co-investor. He is currently at Thrivent Financial for Lutherans, where he is an MD in the private investment group. He co-heads the unit that invests in private equity, provides mezzanine debt financing to middle-market companies, and makes equity co-investments.
Wegener also spent about 10 years at Northwestern Mutual’s private investment group where he focused on mezzanine and equity co-investments.
With all this experience, Wegener knows what LPs are looking for in GPs and what they’re not.
Here’s his list of top three blunders GPs should avoid when fundraising.
- Failure to Communicate. One of Wegener’s biggest pet peeves: GPs who stop talking to LPs after they’ve raised a fund. These GPs are usually very talkative at annual meetings but go silent in between. He estimates that one-fourth of GPs don’t communicate regularly. Wegener says he will reach out to GPs between the annual meetings. However, the responsibility for keeping the lines of communication open rests with the GP, he says. “The LP might not always be right but the LP is always the LP,” Wegener says. The one-fourth who do go radio silent between meetings face a risky future. LPs will re-up with those GPs that post amazing returns. They will also dump those GPs with terrible results no matter how talkative they are, he says. Communication can tip the balance for those that are marginal. “If you’re borderline and we don’t know what happened and then you come calling for the next fund, we’ll probably say no,” Wegener says.
- Upsizing When There is No Need. For this mistake, Wegener provides an analogy. Consider the GP who successfully raises a first time fund that comes in at $300 million. The pool delivers a 2.5x to 3x return. The GP then wants to raise a $700 million fund. Don’t do it, Wegener says. GPs think they should grow their own businesses like a portfolio holding. This is wrong, Wegener says. What made the GP succeed was an appropriate sized fund focused on the right businesses, he says. GPs should focus on what they do best and not try to upsize, he says. “We’ve said no to GPs that have [upsized],” he says. “They should do what they do well.”
- Getting greedy. During the last boom time for private equity, some GPs took advantage of the frothy markets and tried to get a 30% carry, Wegener says. Some succeeded, some didn’t. He wouldn’t name names (you know who you are), but some of these same firms will be back fundraising soon. Don’t expect a welcoming audience. Wegener was approached several times by GPs who wanted to boost the carry. “We said no,” he says.”That’s the message, at least from our point of view. If you get too greedy, we will look elsewhere.”
Image credit: Photo courtesy of Thrivent Financial