What the LPs Want You To Know About the Market Downturn
ICYMI, we hosted the second installation of our virtual AMA series for emerging managers in the market downturn — this time with all-star LPs Beezer Clarkson and Stephen Bluestein. Beezer and Stephen shared their perspectives on best practices for fund managers in recessionary periods and also pulled back the curtain on how LPs are thinking about investments today. Read on for our favorite five takeaways!
1. LP budgets have changed, and they will continue to change.
GP fundraising has been slowing this year, but still remains elevated in the first half of the year vs. historical averages. As a result, GPs should be aware that LP capacity for new allocations will be tight through the second half of the year. What does seem to have changed is LPs’s apparent conviction that these new vehicles should last a minimum of 2–3 years before GPs raising now should be considering a subsequent fundraise.
2. Get started rather than getting it “perfect.”
Beezer and Stephen stressed the importance of knowing what a minimum viable fund size looks like. The most important thing for an emerging manager (especially on Fund I) is building a track record as soon as possible, even if you’re operating at a smaller scale than you had hoped. Also, forget vanity metrics and ego about progression of fund size. LPs are generally happy when their GPs come back asking for funds at the same size as the prior. Assuming your model still works at the same scale, you should be happy to remain there across funds.
3. Fund I was always hard.
For those of you trying to get from 0 to 1, don’t be fooled by the exceptional situations where a heavily credentialed or uniquely networked investor is able to raise their first fund quickly. For the 99%+ of us who have tried to raise a first time fund, it is very challenging and takes 12–18 months. Remember that 2021 was an anomaly in almost every way, so when you look for benchmarks and mentors, look to emerging managers getting started 5–7 years ago. Stay positive, but be realistic about the climb ahead. If you’re hoping for ‘easy’, you are likely to be disappointed.
4. Have and convey a clear understanding of your portfolio.
Most limited partners aren’t surprised by slowing growth due to the macro-economic climate, but they still appreciate clear communication about what is happening in your portfolio. . In Stephen’s words, “all surprises should be pleasant.”As down rounds become more common, LPs appreciate GPs who demonstrate and communicate a clear understanding of how their portfolio companies are positioned and where there is risk. At a minimum, this means having a solid understanding of burn rate, cash runway and supporting logic for current valuations.
5. Ensure you have a coherent valuation framework.
Abnormally low interest rates and the associated excesses of recent years led to unprecedented fundraising growth, especially in 2021. With the public markets correcting to more normalized valuation multiples and venture/growth equity markets nearly frozen, it is important to have a consistent and understandable framework for supporting existing valuations (rather than simply holding at last round prices). Some LPs want to see revision of value (read: discretionary markdowns) where prior round valuations seem unsustainable, but the right approach on this seems up for interpretation. Be sure to communicate with auditors and LPs to understand what makes sense for you.
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