EP268: Inside LP Psychology: How Great GPs Raise Capital in 2025

23:35They have their portfolio, they have holes in their portfolio. Let's say it's secondary just to choose a random ass class. They know that they want to add a secondary manager and then you double click on that secondary manager. Let's say they want somebody specific in a certain vertical with a right to win, that's been doing it for many years, that has the returns, but also wants to partner with them. So it's kind of the sequential thing. Whereas if somebody sent them a growth equity fund, it could have all these things. They could have a right to win. They could be highly transparent, highly partnership focused.

24:01But if they're good on their growth equity exposure, there's nearly a 0 % chance that they're going to add to that exposure. 100%. That's exactly what I'm talking about. You say better than me, David. I think, look, it's like, so we work with a spectrum of GPs from funds that are 200 million up to 20 billion. We work across private equity, buyout, growth equity, credit infrastructure, and then some really opportunistic strategies like aviation, sports, et cetera. And our job is to sort of figure out back to the relevance to the LP, like who to show what to, right? Who's looking, who's shopping for what?

24:33And I think, you know, we're going to, they're going to be certain LPs that everyone's looking for great managers in the buckets they're looking to fill, but they're going to be certain LPs who are more focused on, we want to work with really established GPs, you know, that are on a high Roman numeral and have a long track record. And maybe we're okay with larger fund sizes that come along with those things. Sometimes. Support for today's episode comes from Square, the all-in-one way for business owners to take payments, book appointments, manage staff, and keep everything running in one place.

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26:09Get started today. You have another segment of the market, LPs, that are, they want the opposite. They want to focus on, you know, the lower middle market, or they want to go, they're hunting for emerging managers and groups that are earlier in their life cycle as a GP because they maybe take a view that that's where some of the best alpha is and some of the great returns are. You have LPs who are exclusively looking for sector specialists, right? And are not interested in meeting with a multi-sector firm, no matter how good it is. So whatever their flavor is, whatever they're looking for, I think this just goes back to also for what we do for a living, like building that credibility.

26:45If an LP tells us, it tells us we don't have an infrastructure program. We're looking for middle market buyout. That's in the U.S. And the next week, our salesperson or coverage person, you know, sends that LP an email on a European infrastructure fund. You've just immediately lost credibility because you've wasted their time. You've wasted ours. You haven't listened. I think that's, you know, really important from an LP perspective. I think that's really key for building and cultivating relationships again is like, are you a good listener? Are you bringing them solutions to the problems that they have?

27:20Or are you bringing them ideas that are that fit the list that they are shopping for? And that's not an egotistical thing where an LP just wants people that'll pare back what they're asking for. It's a time efficiency thing. If I'm spending time on this infrastructure deal I don't want to deal with, that's time that takes away from that middle market PE opportunity that you should be sending me and that should be spending my time on. I think about how managing my inbox, right? My email. In our modern time, that's such a big piece of everyone's life is managing your inbox. And then I think about, I don't even have capital to invest, right?

27:55What if I had money, right? And capital to invest. The inflow of pitches and proposals and ideas is ludicrous at this point. And I think, are you adding to that problem? As an agent, are you sending people things that are not relevant for people's portfolios? That's something that they have to take time on and respond to it. Or are you being a value-added partner to them? Are you listening to them? and are you picking your spots accordingly, right? So I think it's about everyone's most precious commodity in our job is like, is this time, right? And are you being respectful of their time and thoughtful?

28:33And by the way, I've talked about the LP side, but it's also, are you also being respectful and thoughtful of your GP client's time? We hear horror stories all the time of GPs we've talked to who haven't maybe worked with an agent before and we'll ask them about their last fundraise and they'll tell us stories about how they showed up to meetings with investors, all excited. and let's say they're a US healthcare fund. And in the first five minutes of the meeting, do their intro and the investor says, it's great to meet you. We don't have any allocation this year and we actually don't invest in healthcare funds.

29:03Great, you got the meeting, but you've ultimately wasted your time and you've wasted the LP's time. So I think it's on both sides of the GP and LP equation. We started the conversation with the exact right framing, which is there's a lot of noise, but it's all about that first close and having momentum on that first close, that solves 80, 90 % of the problems. So on that first close, does it ever make sense to have fee discounts or is that also negative signaling in the market? And how do you reconcile these two different philosophical approaches? It depends on the fund and the asset class and the situation to an extent.

29:38Where we see things like fee discounts for first closers as more common practice is first and foremost, maybe on really large funds, like large cap funds, right? because you're hurting a huge number of cats there and you've just got a huge quantum and capital raise. Again, not clients that we work with, but I think we see that in the market. I think it's also more common in certain strategies and asset classes. For example, infrastructure and credit. I think, particularly in credit, I think we see that it's more common. It's not universal, but it's more common. And because of that, I think in those categories, I don't think it necessarily signals weakness to the market.

30:17I think, you know, because it's more accepted standard practice, I think it's just viewed as a tool of driving a more efficient fundraise. I think where it's less common is in the middle market and the lower middle market, you know, in buyout and growth equity, which where we have an active practice. And it's less common and we typically do not advise it. In fact, we usually advise against it because I think sort of in that asset class, I think two fundamental reasons. I think we take F you. First is back to something I said earlier, just philosophical point. I think in these equity strategies, I think people are investing and moving early because they're excited about the return that they can make.

30:58They're not moving early because they're saving on cost. Net-net in the context of their whole portfolio and they're signing up to these funds for 10 years, these are big decisions. Saving some basis points on the management fee isn't a reason for people to buy something. I think the second reason is to use it, David, just because it's not common And I think there's a risk of negative selection bias if you're doing that in a market where it's much less common. So we ask, well, why do you have to do that? And you mentioned that they're moving to get returns. They're not focused on the basis points.

31:31Why do they care about getting the first close? Is that just about getting their allocation? It sort of depends on the situation. I think what we talked about is like the sort of a vague example we were both referring to is a scenario where it's a really sought after fund and it's credibly going to move quickly. And then, yeah, I think often a big part of the practical incentive is to secure allocation. I think there is also maybe a softer point, but it's a real one. I talked about the idea of partnership and relationship between LPs and GPs, and I think that goes both ways. And a lot of LPs recognize that it's really helpful to the GP for people to move quickly, right?

32:10It means less time in the market. It's really valuable. Those first close, we always say like dollars in the first closer are the most valuable dollars in a fundraise. And I think LPs know that. And I think some really forward thinking LPs, you know, who want to have a differentiated relationship and care about that. I think they're proactive and moving early because they know it's going to be meaningful, really meaningful to the GP. the GP is going to remember that for a really long time. Do you find that in practice that that's an effective strategy as an LP? Absolutely. Absolutely. I mean, look, GP is fundraising is hard, right?

32:41Fundraising is hard and it can be long and it can be a big drain on time and energy. And folks who show up early, I absolutely, GPs remember that, right? It's meaningful to them. And again, I think LPs know that. And so I think that's often also a driver. Going even more upstream of that first close, that first 60-minute meeting with an LP, you only get one chance to nail it and get a second meeting. What are the best practices there? We talked a lot about nailing the narrative, right? And we talked about running a 360 on your firm, on yourself, right? So that you don't go in blind. Like, and again, the reason to do that for that first meeting is, so you've already gone out and checked with the market, especially if you're an established fund who's raised before, right?

33:34You have existing LPs. You're, you're, you're just getting unvarnished feedback of what investors really think about you. Right. And again, what are the things they think you do well? What are their, but also you get a sense for like, what are sort of the things that, what are the areas they're going to challenge you on? Right. Or if they're a prospective investor, like why haven't they, why didn't they invest last time? And I think knowing that going in and taking the time to do that work, you know, which can be scary to, I think to a lot of GPs, like getting it, like it's like performance reviews for all of us at the end of the year.

34:11Right. It can be scary to open yourself up and listen to what the market says, but it's incredibly valuable because you're not going in blind. Right. And you can then use that time to, figure out how you lean in your strengths or bring out the differentiators or for the things that are going to be challenged on the people, things that the things that people maybe haven't liked in the past, you're going to be prepared on the front foot to talk about that, to address those concerns. And so I think that's, you know, that's really important. The other things that we maybe haven't talked, I don't think we've really talked about yet.

34:42Again, how do you set yourself up for success and be prepared for those that first meeting? It's kind of like, I'll use that as analogous, like, how do you set yourself up for a good raise? We talked about building early momentum. And we talked about the importance of our first close. So focus on what you can control ahead of that meeting. And one of the things that a GP can control in this environment, right? There's a lot of things we can't control, like how the market, how the person's going to react, et cetera. But one of the things a GP can control is where they set their target fund size, right?

35:11Upstream of momentum. So if you're 50 % to a$500 million raise, you technically would be 100 % to$250 million raise. I know it's not one-to-one, but you actually could control your momentum in that matter. I think that's right. And really, it's about, I think the mistake, again, that we see regularly is GP's just setting a target in a vacuum. A target based on what they worked last time. Like how much did they grow last time? Let's do the same. Or just a target that's based on what they think that they deserve or that they should raise. And I think about, I flip it around and say, well, if we want to get 60 to 70 % of the first close of the target, excuse me, in the first close.

35:51Let's, let's work backwards from that, right. And figure out, talk to our existings, figure out where they are really at, right. What support do we have and start to sort of get a sense, hopefully from an advisor, what do we think demand is going to roughly be from new? We're not always going to have, be able to predict that perfectly, but with the existings, we'll be with the existings, you can get a good read early. And then let's set a target where we can realistically, we have kind of line of sight that we can hit that goal of achieving 60 to 70 % of it in the first close, right? Let's do that work.

36:24Let's be informed about that decision, right? Based on data and based on the assessment, let's not just set a number and walk into the meeting, right? And get surprised on the negative. To further that, instead of going after this hypothetical$500 million fund, which if maybe miraculously you'll raise in 24 months, why not raise half of that in 69 months, come in with momentum, and then two to three years later, be back with another fund. Everybody's happy. The LPs are vouching for you versus kind of these unrealistic goals that you would have never, you would have never hit anyways. But even if you would have hit, you'd be in a weaker position.

36:58I think that's, that's right. I've talked a lot about what the GP can do to prepare themselves and their story and, you know, the fund size. What maybe I haven't talked about, but that's super important. A huge part of, I think, what our value proposition is to general partners going into a fundraise is like, you also want to go into that meeting with like an educated understanding of who that LP is, right? At the organization, at the institutional level, but also the individual you're meeting with, right? What's the role in the business? And, you know, again, what does their portfolio look like?

37:30what problems do they need help solving doing that work to sort of understand your audience and just sort of and and to really to to an extent tailor your your presentation and tailor where you talk about that can be really really valuable right i think um it's sort of like on it's one of my colleagues said this to me the other day i thought it was great it's like we want gps going and understanding like what's the question behind the question right um so that they're prepared when an lp goes into a certain line of questioning if you understand their program, what their experiences have been, who else they're invested with, right?

38:02Why they haven't gotten there before on your fund. You go in more informed of like, what are they really getting at? Like, what's their fundamental, what do they fundamentally care about here that I need to make sure that I hit on it, that I, that I address head on in that first conversation. So I think that education on the LP program going in is really important. It could save everyone a lot of time and lead to better outcomes. To operationalize that, who are the people that get all this research that spend the 10, 20 hours on the LPs. There's people that have a lot of belief in the fact that that LP is actually interested in their strategy.

38:33So obviously working with an Evercore, but in general, just getting high integrity information on the LP could actually lead you to do that homework, which will lead you to better results, which this kind of upward spiral and opposite happens as well. You spend, maybe you spend five times doing all this research and then you have the meeting and you realize that they're not even interested in the space. You start to do less and less research, which has a downward spiral as well. Yeah, absolutely. Private markets fundraising is like, it's an incredibly inefficient process, right? Sort of why we have, why there's any, what justifies our existence as an agent, right?

39:03It's an opaque market. It could be really, really inefficient use of people's time. So I think what you're talking about there is like, how do you just make that more efficient? And I wanted to double click on that hypothetical example of this$500 million and the$250 million fund. So tell me about that and give me some examples. And your question there was? Basically, my point was, you know, another way to say fundraising is a momentum machine. That's the theme of, it's all about momentum, about this, about the fundraising, the first close, but the franchise itself, if you zoom out, is also about momentum.

39:36How do you get a great fund two? Do a great fund one that's oversubscribed. How do you get a great fund three? You have to build this momentum with these recurring games with all the actors in the space. So what I'm saying is instead of coming up with an arbitrary 500 million, if you truly have 250 million demand, which is very impressive in this market, then sequencing the right way is more of a thought experiment. I'd love to get your thoughts on some real world experiences and how you see that in the market today. Yeah, so if I get your question right, I mean, it's a little bit, it's sort of like, I guess one way we think about it is we'd much rather set a conservative target and get that slightly wrong in terms of there being more demand and generate momentum than the other example, which is to be really foolhardy on the target or almost overly aspirational and get stuck in the doldrums, right?

40:25We talked about what happens when you get to this great first close, but we didn't talk about what happens if you don't. And I think you see a ton of examples of this in the market. If you don't hit 60 to 70%, if you're like less than 50 % of your first close, because you, for whatever reason, right? But you set a big goal and you can, you know, that is what happens to private equity fundraising. if you have a weak first close, you'll just get caught in the doldrums, right? Now you don't have momentum. Now you don't have scarcity value. And the market sort of will take the stance, okay, they set a cover of a billion dollars and they have a$200 million first close.

41:02Like I've got time, right? I could sort of see how this plays out. I can wait for the final. And that's what we're, I think GPs and certainly the work we do, GPs, that's what we're looking to avoid, right? When we can, because of all the obvious reasons, being out in the market a long time is a drain on everybody. So we'd always rather be more scientific about it and to an extent more conservative on the target to generate that momentum. You also kind of talked about something, you also referred to something else, which gives me a thought in terms of, is it basically better to, aren't you better served to almost raise a smaller fund and get it done quickly than to go for a bigger target?

41:38You might get there, but you're out in the market for two years. And I think generally speaking, I'm going to generalize here. I think the answer is not surprising is like, yes. What, you know, I was talking to a GP the other day about this and they actually have a great hands and we have high conviction that they're going to get to where they want to be. But what I was articulating to them is look for us, the way we think about at Evercore about partnering with GPs, it's not just about this fundraise, right? It's not just about fund one or if it's a fund two in this case, it's about, we're immediately thinking about fund three and fund for.

42:10How a fundraise lands and how it unfolds in the market really does matter, even if you get to the end goal. And I think the sweet spot is if you can run a raise where you're in and out of the market in an expedited fashion, and even if you do have a lot of demand, you're really thoughtful about the LPs that you prioritize and how you curate the list of investors for that raise, like hopefully you're doing a couple of things, right? You're doing a couple of things, right? One, I just think when you have a raise that moves quickly and is oversubscribed, people will remember that, right? So it kind of establishes a good fundraising brand for your GP for the next time.

42:50It means next time you come back, LPs will remember that it, you know, it moved efficiently last time. And they like that because what LPs really want, of course, is, I mean, it shows them demand. Yeah. And it shows them it's a good product, but And also investors want GPs, they don't want GPs out on the road forever, right? They want GPs focused on the portfolio and on delivering returns and adding value. So I think there's a lot of like cascading benefits to getting in and out in an expedited timeframe. And so if doing a slightly smaller fund is gonna achieve that, I think that pays dividends for you, you know, down the road for your next race.

43:25I think there's just sort of an aura effect with that. I wanted to push back on something that you said earlier in this context, which you said, the worst call to make to an LP is that they're gonna get cut back Is there not a golden ratio? If you cut back an LP from 20 million to 15 million, don't they net-net have a better experience than if they got the full 20 million? If you cut an LP back from 20 to 15, do they have a better experience than if they had gotten the full? It's the truest signal of being in a hot fund. Yeah, I think that's a good, I like that framing. I mean, obviously if you cut them back to five, they might be unhappy, but it feels like if you take the same heuristic as rounds or IPOs that getting cut back, they may not never admit it, but it's actually a pretty good experience for the LP.

44:03that's a really glass half full way of framing it. So I appreciate that, David, I might use that. I might steal that one from you. I think that's right. I mean, look, I think if I just think about in the LPs that I know well, I think that's a big part of their value. And I think in terms of how, you know, frankly, it reflects on them internally and individually within their organization. You know, if they're able to get, show that they got an allocation, even if they were cut back, they participated in a fundraise that was oversubscribed and the other LP down the street didn't get any. and, you know, it was a select number of investors.

44:35I think, you know, maybe oddly, but I think accurately, that reflects really well on them. Like they've probably made a good call and hopefully that plays out in returns, but it certainly reflects well on them that they secured an allocation. And I think that sort of, to your point, if there are cutbacks, it's probably indicative of a really high quality GP, right? Now there are really high quality GPs that, you know, we work with and in the market, by the way, we should say, that are where we go in knowing it is going to be a longer race right because we're building a brand and we're building a story and that those can also reflect great on lps when they sort of take a chance and they do go into a fund that maybe doesn't even reach its hard cap because they believe in it and i don't want to give short shrift to that um it's not all about just following the crowds but but i think that's right and look allocations are always um you know allocations for for funds that are in demand um it's we always start with like from the gp's perspective let's be honest it's a high quality problem to have.

45:29Like you would like to find yourself in that position every time, right? You have excess demand. But it's still a problem if you've got, you know, if you're 2X oversubscribed and you've got to deliver some tough messages to LPs, especially if like those are real relationships that are value. Like, you know, our business, we have clients on two sides, right? Obviously we have the sponsors and the work we do for them, but equally we have our limited partner relationships. And if we're not treating, if we're not treating our limited partner relationships with respect and integrity, you know, they're going to go away real quick.

46:01And then frankly, we lose our value to the GPs in the first place. So it's really, it's very circular. And I think the ideal situation often is, you know, for us is, and for GPs is like, look, we, we GPs want a diverse LP base, right? They would, they would like as many high quality names as possible. And so if we've got a lot of demand, it's often, how can we sort of get as many people in as possible, assuming they all want in, at an allocation that works for them. It might not be their perfect allocation, but at an allocation where it's not painful, it still works for their program. And so we've sort of delivered a high quality product and gotten the LP in at a number that works for them.

46:41And then they can build on that relationship and future funds that hopefully they feel good and they feel well-treated. And we've delivered the GP, really great diversification across a number of LPs and a successful fundraise. from a GP perspective, from an agent, but that's sort of the perfect outcome. One thing I just reflect on all the time and, you know, case in point, just getting to have these kinds of discussions with people like you is I love talking about this stuff because I, you know, I'm really one of the lucky, one of the lucky people who's ended up in a career that I just really, really enjoy.

47:16I mean, I, you've heard me talk a lot about storytelling and nailing the narrative. I love storytelling. I always have. But we've talked a lot about relationships and I've always just loved coverage and getting to know GPs and LPs, what makes them tick. If I was to sum that up for all shapes and sizes of GPs, the analogy I always use is raising a fund today without a placement agent. It's kind of like running a marathon in dress shoes. you might get there, but it'll take longer, it'll hurt more, and you'll probably look worse while you're doing it. And whether you are a GP who's in a great position and has had successful fundraisers in the past and has strong numbers and a great story, I advise you to think about the fact that even the best Olympic athletes who get gold medals, they all have a coach, right?

48:07So there's probably somebody out there who can work with you to make what's maybe already a really good story, even better. If you're a GP who, you know, is established, has been around, but just isn't getting the traction that they think they deserve right now, or feels lost in the shuffle of where the market's evolved to, I think an agent, you know, for you can really do that work to help you elevate your narrative. And if you're building your business for the first time, if you're raising a first time fund or emerging manager, you know, a great agent can partner with you to go out and establish your brand in the right way and build your customer base from the ground up.

48:44And I really, really appreciate you having me on, David. It's been an absolute pleasure. Thank you, Alex. That's it for today's episode of How to Invest. If this conversation gave you new insights or ideas, do me a quick favor. Share with one person in your network who'd find it valuable or leave a short review wherever you listen. This helps more investors discover the show and keeps us bringing you these conversations week after week. Thank you for your continued support.