Your General Partner Can Be Your ‘Outsourced Dealmaker’
In many ways, Private Equity has become the ultimate deal sourcing machine, where Fund managers are incented to find compelling private market investments for their Limited Partners. However, gaining access to quality deals and co-investments with consistency can be challenging for many Limited Partnership investors.
Private Equity as an asset class has grown tremendously over the last two decades. Over that period, private equity returns have been compelling, and Limited Partner investors continue to allocate ever-larger portions of their investment portfolios to the space.
In a world awash with investors and deals, forward-thinking Limited Partners can increase their access to quality opportunities through an intentional effort to nurture the relationship with their General Partner. Where the relationship is strong, the General Partner can become the de facto ‘outsourced’ conduit for high-quality private market investment opportunities when there is limited bandwidth for underwriting.
There is an adage in investing that states “size is the enemy of returns”.
Private Equity Investing Takes Expertise – ‘Top-Quartile’ Teams are Rare
However, the General Partner is not simply a conduit for deals. The investment mechanics behind managing private equity deals are complex. It continues to take great expertise to effectively source, diligence, close, and successfully exit private equity investments.
The skillset necessary to achieve success in private equity investing is diverse. Successful General Partners are adept at sourcing differentiated opportunities, understanding key financial metrics, growing revenue, managing cash flows, building the business, maximizing valuation, and executing optimal exit scenarios.
Successfully and repeatedly execute this strategy, and Limited Partner investors can expect to grow their investment at an annualized rate of between 15% and 30%. This is easier said than done. Many General Partner teams fail to reach this standard. However, those that can consistently and repeatedly hit these metrics are considered top-quartile managers. Top-quartile managers are difficult to find, and maintaining allocation within their fund products can be even more challenging. As a Limited Partner, if you find one, put in the time to deepen that relationship. Your portfolio will thank you for maintaining access to the deal flow of your General Partner.
Caution – Size Can Be the Enemy of Investment Returns
There is an adage in investing that states’ size is the enemy of returns.’ The larger the fund or investment, the harder it is to achieve outsized returns as an investor. There is much truth to this adage. Historical return statistics do show a tendency towards decreased returns as the notional value of a fund or investment increases.
In this respect, investment success can lead to increased challenges for both General Partners and Limited Partners. Investment success for Limited Partners puts them in the position of having a more extensive portfolio and the challenge to find more differentiated investment opportunities. Investment success for General Partners often leads to raising a larger fund and the challenge of having to put more capital to work while still achieving outsized returns.
The Best Option is to Leverage the Expertise You Already Trust
There are several options that Limited Partners can pursue to overcome this challenge. However, each option comes with additional risk. The most common option is to find new managers to invest with and begin the General Partner due diligence process anew. With over 8,400 private equity managers active in the investing marketplace, this can be a daunting endeavor for many Limited Partner teams.
It is easy to find new funds accepting capital. However, it is extremely difficult to find new funds with the expertise necessary to achieve top quartile returns consistently. With luck and valuable connections, Limited Partners can gain access to the ten to fifteen global private equity franchises. However, most of these franchise fund managers are difficult to access. Besides, most of these funds are extremely large and are challenged by size as well.
We believe that the most beneficial option is for a Limited Partner to increase their allocation to co-invests – placing additional capital directly into deals alongside the General Partner. This option allows the Limited Partner to deploy more capital and to leverage the operational expertise of a Partner that they already trust. Yes, this option can add additional deal-specific risk to the portfolio. However, this risk can be partially mitigated because the investment is being made alongside a team with a proven track record.
Engaged GP/LP Relationships are the Key to Sustainable, Long-term Investing
As a General Partner, we have met with Limited Partner teams of all shapes and sizes. We have taken part in well over 500+ due diligence meetings. We are constantly surprised by the narrow set of questions we receive from many of these investors. Even though the opportunities and risks involved in private equity can be broad and diverse, we often receive the same ten to fifteen questions from most investors.
However, we have also had the good fortune to meet a handful of skillful institutional investors that treat the entire process differently. These investors flip the screening process. The due diligence is still rigorous. However, the relationship is less of an interrogation and more of a partnership development process – right from the first meeting. These investors understand that to truly uncover top-quartile talent and gain access to high-quality, differentiated investment opportunities – the relationship is the key. – Ross Iverson, Co-Founder & CIO Manna Tree
As a Limited Partner investor, consistently gaining access to the best, highest-quality private market investment opportunities can be challenging. The amount of funds chasing private equity investment opportunities globally is at record levels. The best strategy to employ to increase this access is to build a strong relationship with your General Partner team.
Here at Manna Tree, we are constantly motivated, gratified, and fulfilled to bring our Limited Partnership investors the best opportunities in the world. Building, engaging, and nurturing strong Limited Partnership relationships is in our DNA.