Avoid Redemptions, Get More Re-Ups…

It doesn’t matter whether you are a hedge fund or private equity fund, at some point you are going to run into an investment committee that is contemplating pulling their support.

The unfortunate reality, it may have nothing to do with your investment performance or firm itself - an allocation strategy may have changed, a new CIO may have a different outlook, or there is the promise of something more around the next corner. Whatever the reason, your allocation is at risk. Does the allocator redeem or stay with you, re-up, or put capital to work elsewhere?

If the situation has deteriorated to this point, you aren’t going to have much of a chance to plead your case. Avoiding the redemption or getting the re-up will come down to one thing, and one thing only – did you build the loyalty necessary to avoid the axe.

When faced with this simple question, most asset managers, regardless of form, would start to sweat. Why, because not many people in this business are making a conscious effort to build loyalty across their LP base. Do you disagree?

1.)   How often are you promoting something other than performance?

2.)   Are you talking to people and not the institution itself – think on it?

3.)   Is there an emotional bond between your customers and your organization?

4.)   Is there an underlying belief that you are contributing in ways that eclipse investment returns?

5.)   Is there anything you do that LPs can brag about? (Philanthropy, ESG, etc.)

6.)   Is there anything unique about being an LP of yours?

7.)   Do you provide LPs with something other than what is expected of you?

8.)   How are you demonstrating that you are appreciative of the allocations you do receive?

9.)   Are there any reasons why an LP should stick with you if your performance falters?

If you have concrete answers to the questions above, you are doing well. Otherwise, if your relationship with an LP is ever tested, it’s unlikely to end the way you want it to. 

Number one, never build loyalty around anything that you can’t guarantee. This is extremely logical, right? Can you guarantee performance? I thought not. Number two, loyalty is the currency of brand, without it, you have nothing to trade when things get tough.