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LPs and GPs: from good to great

What makes for a good limited partner - and what makes for a good general partner? This panel discussion held at the Corporations, Entrepreneurs, Funds and Investors Summit in Paris agreed on one thing. It takes more than money.

Jean-Louis Delvaux, Natexis Private Equity International Management; Sven Berthold, WEGAsupport; Christophe Hemmerle, Finatem; Jaime Hernandez-Soto, MCH; and Simone Cimino, Natexis Cape, take part in a panel discussion held at the Corporations, Entrepreneurs, Funds and Investors Summit in Paris.

The LPs and GPs on the panel discussed the qualities that make great LPs/GPs. During the discussion they focused on fund selection, investment negotiation and tracking and reporting issues. All panellists agreed on one thing: a good LP/GP should provide much more than money.

Firstly, they examined the LPs' perspectives with Jean-Louis Delvaux and Sven Berthold. Then the GP side was analysed with respect to the geographical area of practice by Christophe Hemmerle for Germany, Jaime Hernandez-Soto for Spain and Simone Cimino for Italy.

Keeping a good quality of relationship between LPs and GPs

All panellists rejected the traditional image of the LP as a mere asset manager. LPs should acquire an in-depth vision of the teams they support and get very intimate with them. To establish a good, trusting relationship with your GP is a cornerstone stage in an investment strategy and the best way to carry out due diligence. During the union, the LP should be proactive and bring added value to the management team. The LP must share its investment culture with its partners. Transparency about strategy and goals is also highly appreciated by both sides.

Being a cornerstone LP means taking some responsibilities, but never at the detriment of other investors. As such, interference in the daily management is counterproductive and not allowed. However, the LP should have the weight to make these investors more comfortable in certain situations: the LP should be critical especially on issues such as:

• if the investment policy does not match the investment strategy
• if the key person does not work
• if human resources are not adequate.

• defining the allocation and strategy goals and following them accordingly
• identifying the relevant risks in the investment and making sure you can live with them
• staying close to the GPs through frequent meetings, network, due diligence to get good insights
• not being too critical. If you have questions, asks them very early
• being frank and open about opportunities and the GP's strengths and weaknesses.

• giving best practices of the industry and a very useful actionable network, thanks to the LP's wide and deep knowledge of a sector
• helping teams to communicate and share experience on trends of the industry, through meetings
• bringing in its experience about tax and structure issues acquired in the course of previous investments.

Finally, LPs must be able to give birth to a new generation of fund and should help the team to get investors. Their trust in a fund must become a quality standard: a great LP is an opinion leader, confident in its choices and successful in its investments.

Do's and don'ts from the GP side

The panellists made recommendations with respect to two important aspects of the relationship between LPs and GPs: The fundraising process. Defining a strategy.

• A distinctive strategy should be defined, to be remembered among the mass of people raising money around; for instance: medium-sized family-owned companies in certain regions of the country.
• Make sure you have a well-balanced team with different capacities in terms of finance, operational and managerial expertise and constituted long before the fundraising campaign.
• Before launching a new fund, be careful to have all information needed prepared, to have invested 3/4 of commitments and to have distributed significant amounts. Prepare also a sufficient number of exits with outstanding IRR.
• Then, select a qualified fundraiser agency with preferably an expertise in the local market but be prepared to meet investors all around the world.
• Keep in mind that fundraising is the priority: the rest (such as working with deal flow), comes after.
  

Choosing and attracting potential investors

When the local market is not mature, staying in tune with international standards andpractices is an asset, as well as choosing cornerstone investors which are opinion leaders: their contacts and networks will help develop portfolios, and they have the ability to think in pure equity, in contrast to local investors.

Joining club deals to invest faster is the worse way to play in the market: you should demonstrate you have your deals.

Transparency means credibility: a lack of transparency on information to potential investors is detrimental. GPs should be able to show a good track record, to answer LPs' questions quickly and properly (with respect to operations, deal flow, progress with portfolio, etc) and to keep the promises made to investors.

The panellists also insisted that GPs should not over-sell their returns. A fund that would be overly arrogant would have little chance to attract investors. Moreover, GPs should show the added value. But for the fund's management, being successful raising money does not mean the end of their job. It is important that it does not devote resources to unlikely transactions or be influenced by specific market crazes. Because in the end, the fund's attractiveness depends mostly on its returns.

The fund's management: organisation and discipline

Raising money is not the end of the job: every mistake from now on means being out of the market next time. The fund's management should give all their attention to building a well-balanced team, to keep to a disciplined process and to be able to give an agile response to any request. It also should treat all LPs equally, excepting when a cornerstone investor is on the board.

The panellists recommended a strong organisation and a consistent strategy in investing. The strategy must be adapted to local markets to prove efficient. Indeed, each panellist first described the situation in his market before explaining the strategy they used and provided guidelines:

• make deals and plan to have a recurring liquidity, starting from the investment period
• reduce the effective investment period to three years instead of five
• reduce the industry 'niches differentiation' after the first two years in order to concentrate management efforts
• leverage on the experience of key investors in similar companies or sectors in other countries
• a market can change the rest of the environment: you must be proactive and not hesitate to go and see by yourself opportunities in a given market.

This report originated from the CEFI Summit 2004. For more information on the CEFI Summit visit http://www.cefisummit.com