The Best Way to Determine “Fit” Within an LP’s Portfolio

Not sure who made-up the term, “fit,” as it relates to the investment business, but it’s one of my favorites. There may be other interpretations, but to me the word encompasses two things that are incredibly elusive to investment managers when they attempt to describe their funds and investment strategy – relevancy and “value proposition.”

In other words – do you deserve to be “in the conversation” with an LP, and if so, why?

Performance notwithstanding, when we ask managers to describe their fit within an investor’s portfolio, we typically get responses that sound eerily similar to the responses we hear from their peers.

Part of the challenge GPs face in attempting to position themselves differently from others, is they simply don’t know how the others are positioned. Unlike say, Coke and Pepsi, they have no ability to see the “ingredients,” experience the marketing, or “taste” the product.

And of course, if you don’t know what problem your competitors help to address (or are perceived by LPs to address), it’s impossible to ever truly demonstrate value.

Fortunately – ascertaining your perceived fit to investors isn’t nearly as hard as you may think…you simply just need to ask.

Seriously. It’s not more complicated than that.

I know because we do a fair number of “Perception Studies” where we interview existing and former LPs on a manager’s behalf. What often surprises managers to hear about this process is that most institutional investors genuinely want to help.

More than that, though, they tend to be quite open to sharing their perspectives. Part of it is the anonymity - they are talking to an independent third party, and their responses are amalgamated with other responses. But for existing LPs, it’s actually to their benefit since their own success is directly linked to that of their GP partner.

By soliciting those that know you best for their take on what you do particularly well or differently from the market, what you don’t do particularly well, and what you give them that they don’t feel they get from others, you can get a true handle on your “fit.”

More importantly, you now have a profile of the ideal LP – one most likely to value what you do – and clear direction on how to position yourself to demonstrate that you can actually do it.

By JD David