Trey Hart of Northern Trust is back to cover Part 2 of the GP-LP relationship. In this segment we address:
- Key mistakes that GPs make
- The key characteristics that successful GP’s share
- The importance of an ownership focus
- What winning really looks like for GPs, in terms of metrics (ie. DPI, TVPI, IRR, cash on cash, bulge bracket follow on, etc)
- Trey’s final thoughts on the GP-LP relationship and who he’d like us to have on the program
1- The General Partner – Limited Partner Dance
We kicked off the conversation by discussing the importance of storytelling. This transcends the LP-GP relationship and even the venture business. One’s ability to synthesize their experience and craft a compelling narrative is essential in relationships and in sales. Ultimately, a VC pitching an LP is a sales process. Both capital and expertise are for sale. Trey emphasized the importance of timing, during this engagement. He said that one needs to know when a sale is going to happen. The people that stand out are those that understand the cadence of fundraising the best. They need to know when to push and when not to push. And the reality is that a lot of LPs don’t know what they’re looking for, which can put a lot of stress on the GP.
Trey suggested that the most important component is framing the conversation. He aims to have an open and transparent meeting where he, the LP, is clear about what he’s looking for so as not to string along the GP and waste everybody’s time. As he said, there are way too many people to meet with in this business. It would serve everyone to clarify intentions upfront and engage under the right pretense.
2- GP’s that Stand Out
Trey thinks of GPs in two groups:
1-Those that are easy to give money to but are hard to get into and
2-Those that are hard to give money to but are easy to get into
In the LP community, this is what separates the bad from the good and the good from the great. Trey cited Lindel Eakman as someone who has routinely given money to the latter and enjoyed tremendous success doing so. The best in the LP business are those that make money by giving to managers that are yet unproven. I’d venture to guess that there is a similar parallel with GPs giving money to entrepreneurs. Proven founders often raise at very high valuations early on, limiting return upside. While first-time founders may be much harder to assess, the upside opportunity is higher for those GPs that take the risk. Hence the return profile for the earliest stages in venture capital is often the highest.
Trey said that the truly great GPs have mastery of stage, sector or geography… and in some cases all three.
A few unique characteristics that he’s looking for includes:
-An actual track record
-Unique relationships within the geographic center of their investment
-How integral of a part of the ecosystem the GP is to all the most important things that spin-off; including companies, entrepreneurs, and technologies
And to finish this point, Trey said that Northern is trying to invest as much around those clusters and centers of influence as possible.
3- GP Red Flags
In any engagement, Trey is looking for cues that a GP may have an integrity issue or an emotional intelligence issue.
The following are red flags that he’s observed over the years…
-Do they push too hard, too early trying to close the sale before a relationship has developed?
-Do they misrepresent their track record? One of the most difficult parts of being an LP is figuring out who truly led investments and deserves credit. Misrepresentation and inflating one’s accomplishments rarely have a positive outcome.
-GP does all the talking. They don’t bother to find the points of commonality. Whether it’s family, hobbies, background, investment philosophy, etc… the points of commonality are a great way to establish rapport and build a relationship. Remember this is going to be a long relationship.. one where it’s not easy for the LP to get their money back if they have second thoughts.
-And finally, Trey mentioned that with the good ones you’ve got to make sure they’re not having strategy drift and that they have a team succession plan.
And I’ll leave you w/ a quote from Trey, on a clear disqualifier. He said, “when you’re trying to make judgments where you’re thinking ‘I don’t want to give people money if I think there’s an integrity issue,’ you’ve got to trust your gut because it’s almost always right.”