Raising Capital From Institutional LP’s

Raising capital from institutional limited partners (LPs) can be a challenging but rewarding process for any fund manager. Institutional LPs are typically large, sophisticated investors such as pension funds, endowments, and foundations that invest in private equity and venture capital funds. In this blog post, we’ll discuss what to expect when raising capital from institutional LPs.

Long fundraising cycles

If you’ve only ever raised capital from high networths, or family offices prepare yourself, because fundraising from institutional LPs typically takes several months to over a year. The process involves extensive due diligence, multiple meetings, and thorough evaluation of the fund manager and their investment strategy. Institutional LPs often have strict investment criteria, so it can take time to find the right match.

High standards and requirements

Institutional LPs tend to have higher standards and requirements for their investment criteria. They expect fund managers to have a proven track record of success, a strong investment team, and a well-defined investment strategy. Institutional LPs may also require that funds meet certain legal and regulatory requirements, such as compliance with SEC regulations which can drastically increase the work placed on venture teams.

Extensive due diligence

Institutional LPs conduct extensive due diligence on fund managers and their investment strategies. This may include reviewing investment track records, conducting background checks, evaluating team members, and examining investment processes and systems. The due diligence process can be lengthy and demanding, requiring significant time and resources from the fund manager. DDQ’s are the standard document format that institutional LP’s use when getting initial due diligence on a firms track record.

Negotiations over terms

Institutional LPs often negotiate over the terms of their investment, including the management fees, carried interest, and other terms of the fund agreement. Fund managers may need to be flexible in their negotiations to secure the investment, while also ensuring that the terms are fair and in line with industry standards.

Ongoing reporting and communication

Once capital is raised, institutional LPs expect ongoing reporting and communication from the fund manager. This may include regular updates on investment performance, portfolio company progress, and changes to the investment strategy or team. Fund managers must be transparent and responsive to investor requests and questions.

Potential for future investments

Raising capital from institutional LPs can lead to future investments if the fund performs well and many institutional LP’s will even guarantee an investment in two to three of a firms funds. Other institutional LPs may hold off and consider investing in subsequent funds from the same fund manager if they are satisfied with the performance of the initial investment.

Conclusion

Raising capital from institutional LPs is a rigorous process that requires significant time and effort from fund managers. Institutional LPs have high standards and requirements for their investments, and fund managers must be prepared to undergo extensive due diligence, negotiate terms, and maintain ongoing communication. However, raising capital from institutional LPs can also provide access to significant long term patient capital and the potential for future investments. Fund managers who are successful in raising capital from institutional LPs will have the opportunity to grow their fund and make meaningful investments in innovative companies.