Today we cover Part 2 of The Limited Partner with Lindel Eakman of . In this segment we address:
- Do you think that LP investment strategy is driving the strategy of individual fund managers? Why or why not?
- What are the biggest challenges for limited partners?
- How do LP’s differentiate and attempt to get an allocation w/ the best GPs?
- What advice would you have for investors and first-time GPs listening to the show?
- Any other things we didn’t discuss that you’d like to touch on regarding LPs?
- Lindel on Twitter
- Lindel’s Leap Blog: Why Foundry Group Next?
- Lindel @ Foundry Group Next
- Foundry Group on Twitter
- Part 1 of the interview with Lindel on The Limited Partner
1- Types of LPs
1) Retail: High-net-worth individuals investing their own capital
2) Institutions: Large pools of capital w/ professional staff, long time horizons, and commitments at the asset class level.
-Pensions, both public and private
-Sovereign Wealth Funds
-Collective Vehicles- OCIOs… Outsourced CIO institution… acts like an outsourced endowment staff, which manage groups of smaller endowments delivering some benefits of scale
-Fund of Funds… much like Foundry Group Next where LPs invest in the FG Next fund and then Lindel uses that capital to invest in up-and-coming VC funds
2- The Six Items Required for Investing in a VC Fund Manager
1) Sourcing Advantage: How will the VC fund manager be able to source better deals than other funds?
2) Internal Team Dynamics: How are the interactions and inter-relationships of the general partners?
3) Strategy of Portfolio Construction: Does the fund size reflect the strategy? Does the manager understand how to build a portfolio, hold themselves accountable to it?
4) Performance: Is there a track record and how have previous investments performed?
5) External relationships: How is their external relationship w/other LPs and GPs? What kind of partner are they? Is there overlap w/ Foundry? Do they know how they act on a board of directors? Can the LP do direct investments together and do they want direct involvement?
6) Legal Terms: Does their Limited Partner Agreement include some non-starters?
And, Lindel concluded by saying that, at a high-level, he’s just looking for a cogent plan of how the fund manager is going to build their business. And even if it’s not an immediate fit, he likes to maintain and build the relationship over time to see if that fit develops for the next fund that the manager raises.
3- Issues & Challenges w/ Limited Partners
Gatekeepers: Especially with the large LPs, there can be a number of consultants and service providers that function as gatekeepers
Process & Timing: Slow decisions w/ a longer process at multiple levels of the LP organization
Deworsifcation: Many LPs have over-diversified, which limits their ability to outperform as returns regress to the mean
Compensation: These are professionals, in some cases managing a $15B portfolio. Lindel talked about his team of five at UTIMCO, managing $5B, which is a billion dollars per person. So while their efforts have substantial impact on the economy w/ significant levels of assets managed, these professionals are often grossly underpaid.
Denominator effect of Market Fluctuations: As the AUM move up or down, the allocation to different asset classes must be force corrected to keep the percentage the same. In the case of venture, it is very difficult to get money out, so in these cases where the allocation needs to be adjusted down, the LP must stop making new fund investments.
Mis-aligned incentives: Lindel said “LPs aren’t rewarded for risk… they’re rewarded for IBM stocks.” This has created a environment of mis-aligned incentives where LPs can’t take the kind of risk required to meet their return expectations.