What LPs look for in diverse new managers

Many women- and minority-led GPs are raising first-time funds; here is what LPs are looking for when there is no track record to analyse, according to investors at the Culture Shifting Summit.

Investors are deploying more and more capital into fund managers led by people of colour and women. But many don’t have the track records investors traditionally look for, said speakers at the Culture Shifting Summit, a conference addressing diversity in venture capital.

“We’re intentionally looking to back diverse managers. We want to invest in people of colour and women GPs,” a portfolio manager at a US foundation said.

“Seventy percent of the dollars we’ve deployed over the history of our firm have gone to either women-led or people-of-color-led firms,” said a partner at an outsourced chief investment office.

New Private Markets attended the event on the basis that speakers not be identified so they could speak freely.

As this male-dominated industry evolves, women and minorities are making up an increasing share of emerging or first-time fund managers. But not having an investment track record can make it difficult for such funds to secure LP commitments. Investors at the conference shared what they look for in place of track records for such funds.

Investment experience

First-time GPs will be best positioned to attract capital if the partners have strong prior investment careers, attending LPs said.

“The way I look at first-time managers is: the more arguments you can make that you’re not really a first-time manager, the better,” said one investor. The ideal first-time fund is a team that has left a larger firm together, the person added.

Pitches should “demonstrate that they can get deals done, get into them, get out of them, structure them properly”, said another investor. “I love reading investor memos and investor letters because you really get into the mind of the portfolio manager. Write those memos, because we actually read them!”

Another said: “I want to hear [the portfolio manager] talking about capital markets and how that’s affecting their portfolio and where they will or won’t invest.”

Fund governance

“It’s all about alignment,” an LP said, “making sure that the carried interest, the ownership of the GP, how folks are compensated… all those things are consistent with all the workers working together.”

It helps if the partners are on the investment team. One investor asks: “Are there people in senior level positions that are on the investment side – not just on the operations or the client relations side? Do they have a seat at the investment table?”

“You don’t want a situation where people who are not involved in the investment decision-making have the lion’s share of the economics from a fund,” another LP added. “That rarely happens, but when it does, that’s a big, big red flag.”

Tight team

Investors are also attracted to managers whose partners have worked together previously – the longer and the more recently, the better, several investors said. Even more attractive are partners that have done deals together and have exited together.

LPs also look at interpersonal dynamics. “We really study that interaction and engagement, and what the dynamic is,” one investor said. “We look to see if your governance reflects the ability to break through decision-making and [reach a] resolution when you might disagree. We’ve seen individuals try to partner and then break up.”

Two investors described bringing in industrial psychologists to assess whether the partners will be able to work together effectively. That allows a potential investor to see whether the dynamic the manager has described to them is really there.

Have a niche

“We have a heavy bias in favour of subject matter expertise, versus full generalists,” said one investor.

“We want to see your pipeline,” said another. The GP should “have access to a network of founders that we ourselves would not be able to access or invest in”, they continued. “We care about what kind of value you’ve been able to provide to founders, what kind of values make you really well-known in your community.”

Character and reputation

“It really comes down to the person, the personality. Who is this in front of me?” said one LP. It takes several meetings to gauge this, they said.

Reputation matters, too. As well as relying on the references provided by the GP, investors may ask their own networks about prior interactions with the GP. “I am one person, but I have my own mafia. I have my own alliances with people in this business, and we support each other. So I’ll call five or six other investors and managers, and talk about their experiences with you, where you’ve had success.”

“What’s not a good idea is to go directly to our client and not come to us,” said an outsourced chief investment office professional. “This is not what [professionals in the industry] do… And I find it hard to give the manager an opportunity when there’s stuff like that going on. How you handle yourself is incredibly important.”

First impressions

“Bring your ‘A’ game – so we don’t have to sit in a room and try to make excuses for why you deserve a second chance,” said one investor. “It’s a very serious decision on our part, so make it a serious decision on your part.”

“I take five meetings a day,” said another. “So make my job a little bit easier by being prepared and understanding what materials you need. Be the best part of my day.”