The Hidden Expectations - What GPs Want from Their LPs

The relationship between General Partners (GPs) and Limited Partners (LPs) is often thought of as one-dimensional: LPs provide the capital, and GPs manage the funds. But this is a simplification. While it's true that LPs supply the resources that enable GPs to execute their investment strategies, the relationship is far from one-sided. In reality, GPs have their own set of expectations from LPs, which are crucial to the success of both the fund and its portfolio companies.

The LP’s Role- Financial Expectations and Strategic Goals

LPs, as investors, come in various forms - High Net-worth Individuals (HNIs), family offices, pension funds, sovereign wealth funds, and more. What they all have in common is the primary expectation of financial returns that match the risk they’ve taken on. This is the baseline for any investor, regardless of their type. But beyond this, LPs often have additional, strategic objectives that influence their investments.

For instance, corporate strategic investors might be seeking exposure to new technologies or business models that align with their core business. Development Finance Institutions (DFIs), on the other hand, may prioritize investments that foster growth in underserved sectors. GPs, therefore, are not just focused on generating financial returns, they must also fulfil the broader, more strategic goals of their LPs. This dynamic is a key aspect of the LP-GP relationship.

What Do GPs Expect from Their LPs?

While it’s easy to assume that LPs are the only ones with expectations, GPs also have their own needs in the relationship. The LP-GP dynamic is beyond financial capital; it’s also about leveraging the strategic value that LPs can bring to the table. This expectation varies depending on the type of LP involved. 

Institutional LPs

Institutional investors, such as sovereign wealth funds, pension funds, and endowments, are typically the largest sources of capital for venture funds. These LPs are in it for the long term. They choose fund managers carefully, often committing to a fund for a decade or more, sometimes spanning three full fund cycles. In return, GPs expect institutional LPs to play an active role in the capital raising efforts by facilitating the anchor investment, signaling confidence to other potential investors.

These LPs, who typically invest across asset classes, also bring deep governance expertise and best practices. GPs can rely on them for valuable insights and feedback, especially around fund management and operational improvements. Moreover, institutional LPs often serve as key references for other investors, especially when a manager is performing well. Their introductions and endorsements can be pivotal for future fundraising rounds.

Corporate Strategics

Large corporations investing with a dual purpose play a unique role in the LP-GP dynamic. They are not only looking for financial returns but also seeking visibility into emerging technologies or business models that align with their core or adjacent business sectors. In many cases, corporate strategic investors also aim to become active partners with portfolio companies, either as direct investors or business collaborators.

The value they bring goes beyond capital. Corporate LPs are often well-positioned to provide strategic partnerships, market access, and even acquisition opportunities for portfolio companies. This can be a game-changer for portfolio companies looking to scale quickly.

Family Offices and HNIs

In markets like India, family offices and HNIs, often successful entrepreneurs or business families, are increasingly investing in venture funds. These investors are uniquely positioned to add value to portfolio companies since their established businesses can serve as potential customers or vendors for the startups in the fund's portfolio, helping them scale. Furthermore, family offices and HNIs are often more inclined to make direct investments, providing critical follow-on capital during early funding rounds, particularly up to Series A.

Additionally, these investors also bring invaluable experience in building and scaling businesses, which can be a huge asset to early-stage startups. GPs should not only look to them for capital but also for mentorship, advice, and industry connections.

New-Age Entrepreneurs and CXOs

A rapidly expanding and influential category of Limited Partners (LPs) consists of new-age entrepreneurs and C-suite executives, particularly those who have successfully founded, scaled, and exited startups, who now play a critical role in backing funds with both capital and industry expertise. For these investors, the motivation is often to give back to the ecosystem. They bring mentorship, strategic guidance, and deep networks that can open doors for portfolio companies. These LPs can also be a valuable source of deal flow and founder referrals, which can help the fund source high-quality investments. Their established networks within the entrepreneurial ecosystem provide a unique advantage to GPs looking to tap into the best opportunities.

The Value of a Two-Way Relationship

The LP-GP relationship should not be viewed as purely transactional. GPs need to actively engage with their LPs, not only for their financial capital but also to tap into the strategic value they bring. GPs must recognize that LPs; if properly cultivated, can become invaluable partners in the journey of building a successful fund and portfolio. By aligning expectations across financial and strategic goals, GPs can ensure a win-win situation for all parties involved like, LPs, portfolio companies, and fund managers alike.

About Taghash
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