Investors have multiple GPs vying for their attention. Their inboxes are noisy and their calendars are full. In a crowded fundraising market where there’s $1 supply for every $3 demand, easy fundraises are the exception, not the rule, and the bar is higher for proving that historically good returns are a predictor of future performance.
While performance is objective and can be benchmarked against peers, we’re hearing from investors that they want to clearly understand GPs’ people, process, and philosophy from the outset. GPs need to work at building conviction in their investments by building trust with their investors both during and between raises through transparent communications and frequent updates.
The GPs who stand out during fundraising are the ones who listen, do their homework, and show that they understand an LP organization’s priorities and mission.
What seems to be proving effective is a “show, don’t tell” approach, with data backed by qualitative reporting on both the successes of portfolio companies and also their headwinds and challenges. For example, one GP we spoke to recently recounted a strategy they employed during COVID where they produced whitepapers on each of their portfolio companies that outlined the individual challenges the pandemic created and how each company was planning to tackle them. It was so well received by her investors it’s become a permanent part of her firm’s communications strategy.
As a GP, you need to excel at pitching your competitive edge alongside your track record. It’s crucial to prove why your strategy will be successful not only in the current market, but also in future market conditions. The deciding factor for an investor could be whether you can convince them your performance is down to skill and not just luck, especially in a down market.
We're joined by our expert panelists who are going to give us insight into both sides of this LP/GP story: Murielle Dawdy, Director at 50 South Capital, and Erin Musgrave, VP of Investor Relations at Bow River Capital.
Watch the full video below and read on for a summary recap.
Murielle Dawdy:
Hi, I'm Murielle Dawdy. I'm a director at 50 South Capital on the private equity team. 50 South is Northern Trust's alts platform. We invest for Northern Trust clients as well as outside clients in buyout, venture capital, growth equity, and hedge funds. As I mentioned, I'm on the private equity team, so I am one of the three people that leads diligence on buyout funds and co-investments. I've been here for three years and I'm based in Chicago.
Sar Ruddenklau:
What is the very first thing you look for in a GP?
Murielle Dawdy:
In terms of an outreach or initial email, it's really having a clear, concise idea or pitch as to what you do and why you're good at it. Providing extra detail is helpful, but with those first emails or first outreaches, just being very clear about what you actually do and why you're good at it.
Sar Ruddenklau:
Erin, I would love you to do the same. Please introduce yourself and give us a brief description of your role over at Bow River.
Erin Musgrave:
Sure. Thank you for having me. I am a vice president on the investor relations team at Bow River Capital, based in Denver. Bow River is a diversified alternatives investment manager. We've got about $3.5 billion under management, and we have five different investment strategies across private equity, growth equity, real estate, and an evergreen strategy. I've been in investor relations my entire career for 15 years now. Prior to this, I was at a Los Angeles based firm, and I've been at Bow River for five years. And so our role here on the investor relations team is to work with our existing investor base and also constantly looking for new investors as well.
Sar Ruddenklau:
I'm sure over that 15 years, your role has changed dramatically as far as scope and strategy?
Erin Musgrave:
Very much so. And the private markets landscape has changed a lot, too. I think it will play a lot into this conversation, but from my perspective, it’s become a lot more competitive. There's been a lot more managers entering the space even in just the last five years. And so it changes really how you have to operate and how you can get through to people.
Sar Ruddenklau:
With that in mind, what do you think has been your most effective pitch to an investor?
Erin Musgrave:
When I can go into a pitch and feel confident that our strategy is differentiated and that I can clearly articulate what we do and why it might be better or different than what somebody else is doing, that's when I have the most success. When I personally don't feel confident in the strategy or why I think we're better, that's when I struggle. So for me, it's the confidence and knowing that we have something different than what other people are doing.
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Marle Curle:
Murielle, like Sar mentioned earlier, your inbox is extremely noisy. A lot of fund managers are trying to vie for your attention with requests for meetings to pitch their thesis. So you said that GPs that reach out to you are better clear and concise, definitely get your attention, but let's double click into that. So what makes the GP stand out, after being clear and concise? How are they getting that meeting with you?
Murielle Dawdy:
We get a lot of cold emails and it's often hard to, one, figure out how they found us, but two, differentiate between different managers. It's helpful if we get a sense of where they found us. Maybe it's a referral from another GP, maybe it's a placement agent, maybe it's just off of pre-plan, but it's not just a total cold outreach.
Secondly, in the initial email, a sentence or two about what differentiates you and what makes you good at your specific strategy. I'd say a one-pager attached is often quite helpful, because otherwise it's just a paragraph of text without a lot of context.
Lastly, I personally appreciate when people follow up if I don't respond. Sometimes stuff just gets buried. So two to three emails, if you are interested and I'm not responding. Maybe I'll respond in the second or third time 'cause I'm just busy. But beyond that, it's just, frankly, a little annoying. So I'd say persistence is definitely good and appreciated, but there's a point where it's probably not a great use of the manager's time to continue to reach out six times if we haven't responded.
Marle Curle:
I'd love to turn that question right back to you, Erin. What's a strategy or tactic that you found most effective when you are trying to get in the door with an LP, leading with that first communication when you're trying to gain a new prospect LP, prospective LP?
Erin Musgrave:
That's super helpful to hear, Murielle, because I always wonder what's too much, what's not enough? If they're not responding after the first time, does that mean they're not interested? So it's good to hear from your perspective.
I have a bit of an old school approach. I try to do very little cold outreach. We’re all getting so many robotic, cold outreach emails that have no connection. It's just like you can tell that it's written by a bot or somebody that has no idea what's going on. If I do cold outreach, I always try to do two things, the first one is to find a common connection point. One that I can think of recently that was successful for me was when I reached out to a prospective LP in the town where I went to school and said, "Hey, I'm a graduate of this college." And instantly, that's like, "Okay, I'll at least open it."
I usually spend a significant amount of time researching on the website. It's helpful for me to know if they're a good prospect, but if I see something that catches my eye, I will drop that directly into the email and say, "Per your website, it looks like you're assisting your clients with finding outside managers," or whatever it is that was that in that case. It shows that if you're going to take the time to respond, I should take the time to put something into the email.
In that case, he responded, "I get a lot of cold outreach and I've got to give you a compliment. You took the time and did that." From a cold outreach perspective, and then once you can get your foot in the door, my approach is listen more than you talk. And I think a lot of GPs don't take that approach, but I just get prepared, ask questions, make it more conversational and less of a pitch.
Sar Ruddenklau:
So you've got your first meeting booked. What's next? What makes a GP stand out to you, Murielle? Is it a particular proof point? Is it the way they present?
Murielle Dawdy:
Typically in an intro meeting, we like to get through background and team, strategy, track record, and then maybe a case study or two if we have time. We're fairly indifferent as to whether people go through a deck or do it on the fly. But the key differentiator is: at the end of the call, do we understand what the strategy is and why you have some advantage in that space? I can't tell you how many intro calls I do that, after an hour, I still have no idea what the fund is investing in or doing. It's the ability to really be nimble in your pitch and tailor it to, A, the time that you have with the LP, but also B, specific questions they have if using the deck isn't something that they're super into.
Sar Ruddenklau:
Being able to read the room, basically, and adapt. In your point of view, what should that conversational balance be? Should you be doing all the talking? Should they be doing the majority of the talking?
Murielle Dawdy:
At the beginning of the call, GPs will often say, "We have a deck, we're happy to go through the deck, or we can just answer your questions on the fly." I usually say to go through the deck and we can ask questions along the way. But asking goes far and it shows that you want to know what's important to the LP. I have had calls where I've been stopped. I've asked the question midway through and I've been stopped and been told basically, "Don't interrupt."
But otherwise, it's just making sure that you at least ask at the beginning of the call if there's anything specific that the LP wants to cover.
Sar Ruddenklau:
Flipping that back to you, Erin, you've booked the first meeting. How do you approach it? How do you lean into the things that you think make your organization stand out?
Erin Musgrave:
I agree with a lot of what Murielle said, and she brought up an interesting point: sometimes as a manager, you know your strategy inside and out and you know what you're doing really well, but to be able to articulate that not in a dumbed down way, but more clear, concise, and simpler to understand. Because if you get too into the weeds on the first call, yes, you know what you're doing, but you're trying to make sure that the person on the other side of the call really understands and grasps what you're doing.
Performance at this point is table stakes. I see there being a trend towards managers who are more specialized rather than generalists, and so being able to articulate, again, your differentiation, for us, is really helpful.
Sar Ruddenklau:
Specialized in what sense? In sector, in strategy?
Erin Musgrave:
For instance, if you have a buyout fund, you're not looking at every buyout deal. You have a size range. Maybe it's a geographic focus, maybe it's a sector focus, a single sector focus. It seems to me like the market is just trending more towards specialists.
Marle Curle:
Yeah, so Sar and I actually attended the Women's Private Equity Summit in Phoenix a couple of weeks ago. A very popular topic at that conference was co-investments. So I'm curious, Murielle, what are your thoughts on GPs offering co-investment rights to LPs? Is this seen as a competitive edge? Are you seeing this become more popular?
Murielle Dawdy:
We raise our own funds. We have fund-to-funds vehicles and one of those vehicles is a co-investment vehicle. So that is something that we will do. Obviously LPs like them because often it allows them to blend down their fees. It's pretty standard today to have at least semi-fee-free co-investments.
Some LPs have a requirement where they have to have one-to-one co-investment with their fund commitment. For us, when we see that other people have first rights, it's not something we love. It's a good way to bridge to your next fund size. So if you're raising a $250 million fund and your next fund is a $500 million fund and you can say, "We invested $400 million including co-invest," it's just an easier story.
But on the flip side, it's money you could be taking fees on. So it's something we definitely like and other LPs like, but often you will not be taking fees on that additional co-invest money. So it's a nice carrot.
Marle Curle:
What about you Erin? Is this something that you're leading with in conversations with LPs, like offering right off the bat, or is it more in the negotiation area?
Erin Musgrave:
We only offer co-invest for fund investors and we don't promise a lot, partly because of the size of the market: we’re operating in the lower middle market which has smaller deals in general. It's interesting to hear Murielle's point of view because I'm finding that a lot more LPs are looking for co-invests and they're often looking for just co-invests or two thirds of what they're doing is co-invest and a third of what they're doing is fund commitment. So that makes it more challenging because if we require a fund investment and then we offer co-invest, it seems the market is trending a bit more towards co-invest heavy. So it's not something we lead with, but it is definitely something that's more of a conversation today than 10 years ago.
Sar Ruddenklau:
What do you think is driving that trend? Is this a way for LPs to diversify their fund manager base or their strategies? Where do you think that's coming from?
Murielle Dawdy:
I think there's two buckets. There's the bucket of LPs that more or less require co-invest alongside their fund commitment. I think that is an effort to get lower fees without getting lower fees. Some managers will offer co-investment with 90% of their fund investments, and that's really just like you're getting fee-free deal flow. That specific scenario is not typical, but I'd say that's probably what those LPs are going for.
If we have the opportunity to size up with a manager we really like in one of their strongest partners in a really great deal, that's definitely something that we like to do. And so on our side of the LP spectrum, it's increasing our exposure to some of the best deals if we can.
Erin Musgrave:
Some of it is, to Murielle's point, where you've already underwritten the manager, so if 50% or whatever percent you were assigned to the work is done and you're comfortable with the manager, it's just getting comfortable with the deal. Some of it is just having more control over what goes into your investment portfolio. With a blind pool fund, maybe it's that you don't like every deal so having more control over where you're really picking your spots, is a big contributing factor. And then obviously fees.
Sar Ruddenklau:
Let's pivot a little bit and talk about timelines. So as we've all acknowledged and we're all aware of, it's a really tough fundraising environment. A lot of fund managers are extending timelines for various reasons. Murielle, if a fund manager comes to you and they've changed their timeline, and maybe they've done it once or twice or three times, what's your perception? How do you want to see that presented and what does that immediately make you think?
Murielle Dawdy:
Transparency is always great to have. We're going to figure out if you've been in-market for three years, so it's easier if you tell us and explain why. During COVID, a lot of funds that started raising at the beginning of 2020 were in-market for longer than they may have been historically. And that's totally fine and the story makes sense, but when we find out six months in that they've been raising for two years... It's better to just be upfront about it. A year, year and a half is pretty typical. Two years is getting a little long, but still explainable. Over three years, there's a question as to why. Either the fund target was too high, the expectations were too high, or just not good at marketing yourselves, but it's taking away time from doing deals.
Over the two-year mark, people start asking questions, and often firms will hire a placement agent. If you can get the fundraise done with a placement agent in two years, it might be worth the fee. But you can't be a year and three-quarters in and say, "We're having trouble. Now we're going to hire a placement agent." So having a good understanding of where you might get earlier on, either talking with LPs, current LPs, when you're not fundraising to get an idea of what their capacity is like to get a feel of what you're going to get and what you need to make up in terms of the target.
Sar Ruddenklau:
Sure. So like you said, transparency is key and being proactive about this planning rather than reactive gives you peace of mind, is that a good summary?
Murielle Dawdy:
Exactly.
Sar Ruddenklau:
Erin, what's your take on that? I know you have relatively short timelines for fundraising?
Erin Musgrave:
We have had fundraise timelines shorter than a year for all of our funds to date, but also it was a different fundraising market. It's changed in the last year-ish, so going forward, who knows?
For us, the reason why we try to make them so short is that we feel it's very distracting for our investment team to have to be on the road and fundraising and doing this whole other job on top of their normal day jobs, which is already a lot, as we know. So we try to make it as quick as we can. But again, the fundraising market is a lot different today than it has been so it’s easier said than done.
Marle Curle:
Fundraising is such a relationship-oriented exercise, but given the state of the current fundraising market, it’s so competitive. So what's your take, Erin, on finding successful tactics or approaches to ensuring LP re-ups when you are fundraising? Are you cultivating those existing relationships or putting more emphasis on finding new investors? What's your approach there?
Erin Musgrave:
It's both of those. The key for us is forming a real relationship, not just when you're fundraising, not just when you need something. We have longer periods of time in between the fundraisers as well, it could be three or four years. So for us, we look at what we can be doing in that timeframe to really make sure that the relationship will be as sticky as it can. Obviously stuff happens, but I think it's really off-putting if you don't hear from a manager for four years. As an LP, if you did this fund and then you didn't hear from a manager for four years, except for their normal form of communication, partner letters, these kinds of things, annual AGMs? And then when that manager is back in-market, they need something and so you hear from them again. We don't like that approach and so we go out of our way to build the relationship in the interim.
The other key thing from my perspective is just being really honest about when things aren't going right and getting ahead of it. "Hey, we're having trouble with this deal. These are the reasons why. This is what we're doing." Instead of LPs finding out after the fact and like, "Oh, it would've been nice to know. Why didn't they call or give us a heads-up?" It's good to communicate the good, but it's almost more important to communicate the bad, to show that you're on top of it, you care about the relationship, and that you're doing the best you can to make things right.
Marle Curle:
Murielle, do you agree that the partnership approach to the relationship-making with GP/LP relationships is key for a long-standing partnership?
Murielle Dawdy:
Definitely. Things happen, and people's budgets change, but when you're fundraising and somebody re-ups or doesn't re-up, it shouldn't be a huge surprise in most cases. So you want to have an ongoing dialogue like Erin said, and a relatively open relationship definitely helps.
Sar Ruddenklau:
I heard it framed in a really interesting way recently. They said, "We used to treat investors like mushrooms. We'd bring them out, we'd ask for something, and then we'd put them back in the dark for a few years." You can't do that anymore.
Erin Musgrave:
No. There's too much competition now. If you're not investing in that relationship, someone else is and they're going to take over.
Marle Curle:
Erin, obviously with proving a successful track record is so important in getting investments, but how do you prove to an LP that it's not just luck and that you are successful for these key reasons? How do you approach that?
Erin Musgrave:
It's challenging. Some of it just comes with time and having done deals, and more importantly, having exited or realized deals. I keep hearing, "DPI is the new IRR," so there's got to be a reason for that. So that helps. But if you don't have that, it's obviously out of your control. So being able to convey why your process is repeatable in a very clear way is helpful, and being able to articulate it and having an actual process in place.
Marle Curle:
Murielle, you were saying the ability to articulate lessons learned and how you speak about past mistakes is also key in those conversations with GPs. When you're speaking with GPs, how are you evaluating that they're going to be committed to a portfolio company's success? What are key indicators there?
Murielle Dawdy:
Not surprisingly, the size of the team. If you have three people and you have 30 portfolio companies, that probably doesn't work. So is the team right sized or at least are the resources right sized? We will do several calls with port co CEOs before we invest, and those are important. Again, not infrequently, the port co CEOs don't have great things to say about the time and attention of the manager, so it'll come across there. But also, again, at least if it's a fund II or beyond, we'll have reference calls with other LPs as well. So there's multiple data points for us to check if the manager is doing what they say they're doing and not just letting something ride after the first year.
Sar Ruddenklau:
We had a couple of great questions from the audience, and I'm going to put this one out to whoever wants to answer it. How does the lack of distributions in the market change the transparency around value creation with port cos?
Murielle Dawdy:
The question is, is it obvious if people are just selling and/or doing div recaps just to get DPI? DPI is important because unrealized is exactly that. You can mark things at whatever you want as long as your auditors say that it's reasonable. So DPI is just a real proof point that the strategy has worked. We notice if, all of a sudden, we know you're going to fundraise in two quarters and you're just selling stuff. LPs can see if you're selling to sell or if you're doing a div recap just to get some points on the table. We don't love that, but again, we care equally about IRR and DVPI. So if it gets some IRR points, that's nice.
But again, people can pattern match and it's pretty obvious if you're just trying to return some capital just to say you've returned some capital. But at the same time, if we haven't gotten any distributions back from any of our managers, we can't commit to any new managers. So distributions at least give people some new money to commit. Maybe, Erin, you have different thoughts on that.
Erin Musgrave:
I would agree. I hadn't thought about it from your perspective. I just have the manager perspective. We've been told constantly over the last two years that we're not getting any distributions. So from our perspective, it's important to us, for the businesses or the real estate properties that are ready, to make the best effort to get those out into the market.
Sar Ruddenklau:
And there's another great question, which is related to this. How much do you factor cycles and vintage years into performance? How heavily do you weight those?
Murielle Dawdy:
We consider, and I think most LPs consider, at least Cambridge or something else, against the manager's performance. So if the fund is a one-five and that's the top decile for that vintage, that's a great fund. So I think again, most LPs look at performance on a relative basis, either against Cambridge or PME or some other benchmark.
Sar Ruddenklau:
And is that how you would approach it in a general sense, Erin?
Erin Musgrave:
I think so. We're always looking at relative performance, but we're always targeting the same return no matter the vintage. But then when you're looking at it on a backwards looking basis, you have to look at it relatively.
Sar Ruddenklau:
This is an interesting one from the audience. Speaking of transparency, LPs and their representatives in general show very little transparency into their process and timeframe. What are some best practices where GPs are demonstrating transparency?
Erin Musgrave:
For me on a first call, having an understanding of what the actual investment process is on the LP side is helpful, and I always try to ask that question because it varies so much. Your big, big institutional investors, sometimes they only go to IC once a quarter and the decision-making process is really slow. So it's nice when the LPs offer it up. "Okay, so as the next steps, we're going to take this fund. We meet IC weekly, we have an internal discussion, and then we'll let you know next week if we want to move forward and have further discussions." Having a clear understanding of what your timeline is is helpful.
Because you have to remember, too, that we don't want to be bothering you, but we also know that you are really busy and have a lot of other managers that you're talking to and other things you're working on. So to manage those expectations of, "I'll follow up with you next week if you tell me that's when your IC's meeting," or, "I'll follow up with you in two weeks and then we can better align our communication cadence that way”. Most LPs, I think if you ask, will tell you, and they usually have some process in place but if you don't ask and you leave the call and you don't know, that's the worst position to be in because then it's like, "All right, what do I do from here?"
Sar Ruddenklau:
What's your take on that, Murielle?
Murielle Dawdy:
If you don't ask, we're probably not going to tell you because it's taking time away from questions we want to ask. So it doesn't hurt to ask. People may be concerned it comes off as presumptuous, but I don't think if somebody liked or didn't like something, that wouldn't really move the needle at all. But I'd say we get asked maybe 10% of the time about our timeline and what we like, et cetera.
Erin Musgrave:
That's a really interesting stat that you only get asked one in every 10 calls, because I think there's a way you can ask it, too, that's not presumptuous. I get it coming from the GP side if it sometimes can feel presumptuous, but you can ask it in a way of, "If we were to move forward in this process, what would that look like," just so that we can have the same expectations or we can be on the same page. There's a way to ask it that's not like, "Okay, what are the next steps?" That feels, to me, pretty presumptuous. But I think that's very interesting that most people just don't ask and then you're just in the dark.
Sar Ruddenklau:
We've got two minutes left, so we'll do a quick fire. Let's start with you, Murielle. Give me your top two or three dos and don'ts for GPs.
Murielle Dawdy:
Top two dos: be flexible in how you pitch, given LP expectations. Also, again, be concise, make sure that you're really communicating why you're good at what you're doing.
Don'ts are: don't be rude. If an LP stops you in a call to ask a question, it's fine to say, "We'll get to that in a few slides," but... I hate to say that. It seems like it should be pretty obvious, but just be polite. And also, again, if you've emailed someone five times and they're not responding, they're probably either not interested or they're busy and will get back to you. So limit the number of times that you send the same email.
Sar Ruddenklau:
Great advice. And Erin, what are your top two?
Erin Musgrave:
I'll do don'ts and dos together. My don't would be: don't just contact LPs when you're fundraising, and do build that relationship in the interim. That's key. A do would be, be honest in your communication, like we were talking about earlier. Talk about the bad and not just the good. I think that it builds so much trust when you can just be upfront and say, "This is what's gone wrong and these are the lessons we've learned." And so building that trusting relationship is such a big part of it.
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