What to Say to Your LPs Right Now
It’s a rough time in most corners of the financial markets, to say the least. Fund managers, of course, need to be on their front foot in managing their portfolios, but also need to give special care to their LP relationships. In times of stress, great fund managers can build enormous credibility with existing and prospective LPs.
Understand the LP Context
The first thing needed to effectively communicate with LPs is to understand what they are wrangling in a moment like this.
Most LPs are managing complex, multi-asset class portfolios, made up of dozens of fund manager relationships. In moments of pervasive stress across multiple markets and asset types, there is a lot they are tracking. Good LPs will go through a reasoned, steady process in response to market tumult.
Triage
First step is to always to check on liquidity. LPs want to know they can meet their obligations for institutional spending, funding unfunded capital commitments, and rebalancing their portfolios. They’ve likely (hopefully!) given liquidity considerable thought ahead of time, but LPs also know that things that were liquid can quickly become much less so.
Alongside checking liquidity, LPs want a quick assessment across the portfolio: “How are we doing? Do we have any fund managers hitting the wall or otherwise needing focused, immediate attention?”
Insight
Once they identify and start dealing with any “hot spots” in the portfolio, LPs are hungry for larger insights. They want to gather diverse perspectives that give them a better understanding of what’s going on. Fund managers need to feed that desire for insights. (More on that below.)
Action
As LPs get their feet under them, then they will look to reallocate capital to new opportunities, depending on their level of liquidity. Expect them to generally focus on liquid things before to illiquid ones, and existing relationships before new ones.
If you understand what your LPs’ process is, then your communications can more effectively address their needs and strengthen your partnership.
Convey What You Know
To support your LPs, address their needs for triage and insight.
For triage, even short messages to LPs can be helpful in a fast-moving market.
A VC might say: “It’s a nutty market, but we’re holding on. Two of our portfolio companies may be forced into down rounds next month given how short they are of cash but half of the remaining 14 companies have at least 12 months of burn on hand and the other half over 18 months. We’re actively triaging and working with our founders.”
A hedge fund might say: “The portfolio is generally in good shape. We’re re-visiting raw materials, energy, headcount and financing costs across the whole book to make sure we haven’t missed something in our modeling. We’ve concentrated the book further into our highest conviction names over the past two months and are running with both a lower gross and net ahead of completing work on a few of our most interesting watchlist names.”
LPs want to know your head is in the game, and whether you are doing great, okay, or struggling. Be honest and be direct.
Once you’ve covered the basics, reflect a bit and convey the insights that you are getting from your portfolio. These should include very specific operating metrics for your companies. You’re the expert – what are the metrics you are most attuned to across your portfolio? When you get together as a team and review what you own and prospective opportunities, what are you focused on? Communicate those metrics and your conclusions to your LPs.
This is an outstanding opportunity to remind LPs of your overall investment framework and use its key tenets as a lens communicate these updates.
In addition to the data/facts from your portfolio, layer in illustrative anecdotes that you find highly relevant. Yes, they are not as rigorous as data, but chances are if they helped you understand the world better, it will help your LPs too.
Lastly, be willing to share what you don’t know. What are the specific unknowns out there that are giving you and/or your companies pause?
Share What You Think
Never forget that as an investor you are paid solely for your judgment. Once you’ve conveyed the factual elements of your portfolio and work, do not be afraid to go out on a limb and express opinions. You don’t have to be making any grandiose macro predictions, but your experience will give instincts about your companies and their sectors. Be willing to share those.
As noted, this can be an opportunity to really solidify an LP relationship. Candor is key. Demonstrate mastery of your companies and their circumstances. Draw on your experience to teach and add context. Act as a clearinghouse for other insights you come across, even if not directly relevant to your portfolio.
Call for the Ball
If all signs in your strategy are screaming that it is time to deploy capital, make that case. It doesn’t have to be in this first bit of outreach to your LPs if it feels too early – don’t rush it – but look for the chance to sow the seeds of a future ask.
LPs have a wide range of strategies and firms calling for the ball in times like this, but don’t worry about everyone else. Tell your story, about your strategy, based on your metrics and observations. Most importantly, contextualize the current opportunity set to what “normal” looks like for your strategy and other periods of dislocation.
Different LPs will respond to emergent opportunities in a market dislocation in different ways, largely based on their positioning coming into the dislocation and liquidity position. All fund managers can do is clearly present the opportunity they see.
As noted above, LPs will generally move from liquid to illiquid and existing to new in deploying capital. This means if you’re talking to a prospective LP about an illiquid strategy, you’ve likely got a lot of ideas ahead of you in line. Great communication is the only way to jump the line.
Engage LPs as Partners
LPs have the benefit of incoming insights from across their portfolio, a breadth that is hard for any one fund manager to match. Those can be invaluable to you in managing your firm and portfolio. Your LPs won’t tell you what your competitors are doing, but they certainly can provide a great deal of market context.
Also, don’t forget that LPs talk to each other. A lot. Extraordinary manager letters and analysis tend to find their way around the community and can raise the profile of a firm. Likewise, even if your LPs don’t have additional capital for you at the moment, they might be sitting down with five of their peers next week at an annual meeting and trading notes on what each is looking for and opportunities they see.
June 2022
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This article expresses the views of the author at the time of its publication and such views are subject to change without notice. High Country Advisors, LLC has no duty or obligation to update the information contained herein. This article is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute investment advice and should not be construed as an offering of advisory services or as an offer to buy or sell any securities in any jurisdiction. High Country Advisors, LLC has not independently verified, nor can it guarantee the accuracy of information and opinions expressed herein. This article is the property of High Country Advisors, LLC and may not be reproduced or republished without prior written consent.
