Getting to Know the LP Landscape
There are multiple types of limited partners, each of which can have a distinct approach and set of goals. Below is a high-level breakdown of each type of LP, listed from those who most commonly invest in emerging managers to those who do so least often. For reference, we define emerging managers as those operating three or fewer funds of less than $200 million each.
High net worth individual (HNWI)
According to the US Securities and Exchange Commission, an HNWI has at least $1 million in liquid assets and an ultra-high net worth individual has at least $30 million in liquid assets.
Why they invest:
HNWIs who typically invest in emerging managers tend to be very familiar with the space — perhaps they have been founders or established VC investors themselves. They are typically attracted by the asset class’ high return potential, and they have often personally seen it play out from either or both sides of the table. As Winter Mead, of the emerging manager community platform Oper8er, explains, “Who else would have a greater appreciation of the potential for value creation in the VC industry than the people who actually created and/or captured a meaningful amount of that value?”
Typical check size:
Less than $5 million. HNWIs who are influential or known entities can be great first-close investors, as they may provide signal to other LP groups. However, they may be unlikely to anchor a fund. “As an emerging manager, getting support via an LP check, even if small, from founders you invested in previously or from other strong general partners (GPs) who want to see you succeed is great market validation,” says SVB Capital Managing Director Efrat Turgeman.
Average process length:
Highly variable but tends to be short (1-4 months) given nonstandard diligence process and smaller check sizes.
Family office (FO)
Family offices are private wealth management advisory firms that serve a single family or multiple families made up of ultra-high net worth individuals.
Why they invest:
FOs typically believe in emerging managers’ potential to break out from established fund returns with lower fees, appreciate that they offer innovative strategies with more transparency and see their track record of sharing co-investment opportunities with family office investors, according to SVB’s January 2022 Family Office Report.
Typical check size:
Average of $4.7 million in 2021, according to SVB data.
Average process length:
Highly variable but tends to be shorter than institutional managers (2-5 months).
Fund of funds (FoF)
FoFs, also known as multi-manager investments, are pooled investment vehicles that invest in a portfolio of underlying funds. Some are broadly focused on VC strategies, while others have dedicated FoF strategies specifically focused on emerging managers.
Why they invest:
The FoF strategy aims to achieve broad diversification and appropriate asset allocation with investments in a variety of fund categories that are all wrapped into one portfolio. FoFs also typically attract large pension funds, sovereign wealth funds, endowments and multi-family offices that may not have the expertise — or the team and resources — to conduct due diligence on and evaluate new managers. FoFs can also attract small investors who want better exposure with fewer risks compared to directly investing in securities or individual funds, or who seek access to prominent venture funds they would not be able to invest in themselves. FoFs are also often attracted to emerging manager strategies that offer the opportunity to co-invest.
Typical check size:
Typically seeking 5-10% of total fund size. FoFs’ investments are often capped at a 10% concentration limit due to SEC regulations.
Average process length:
3-6 months with a standard process; FoFs are typically not first-close investors.
Examples:
SVB’s SIF-Ascension Fund, Cendana Capital, GCM Grosvenor, HarbourVest Partners, Plexo Capital, Foundry Group, and Accolade Partners.
Corporate venture capital (CVC)
CVCs are specialty vehicles inside corporations that focus on direct investments and fund investments on behalf of the parent organization.
Why they invest:
Roughly half of the most active CVCs hold LP positions in funds, according to SVB analysis. Taking LP positions helps CVC groups cover their initial investment thesis while providing more exposure to geographies and sectors than they would achieve organically, according to SVB’s State of CVC Report 2021. Some invest strategically, while others are more purely return-oriented
Typical check size:
Typically seeking 5-10% of total fund size. If the CVC is a regulated financial institution, its investment will be capped at the 10% concentration limit.
Average process length:
Highly variable; depends on CVC’s familiarity with the fund investments in question.
Examples:
CapitalG, Amex Ventures, Synchrony, and PayPal Ventures.
Endowment fund
Endowment funds consist of an investment portfolio whose initial capital is derived from donations. Endowment funds are typically established to fund charitable and nonprofit institutions such as churches, hospitals and universities.
Why they invest:
Given endowment funds’ philanthropic nature, their investments typically aim to preserve principal and significantly grow the capital base for their cause. Endowments are often very large, which can be appealing to managers, but they often have restrictions on how and what they invest in. In addition, the size of their capital pools makes it difficult to write small enough checks to participate in funds led by emerging managers. “When you’re just starting out, look for endowments that are open to new funds — they will often list this publicly — so you don’t waste your time,” says Erik Sebusch, partner and global venture capital strategy leader at Mercer Consulting.
Typical check size:
$10 million+ (most commonly $25 million to $50 million or more).
Average process length:
Six months or more.
Examples:
University of Texas, University of Michigan, and University of Pennsylvania.
Foundation
Foundations are typically private entities whose objective is to promote development in a certain geographic area or sector, such as regional economic growth or climate preservation.
Why they invest:
As with an endowment, a foundation’s goal is typically to grow its assets in a diversified manner for a specified and stated purpose. For emerging managers with an on-thesis sector or geographic focus area, foundations can be an attractive LP that adds value. However, foundations are not often seen on emerging manager cap tables.
Typical check size:
$10 million+ (most commonly $25 million to $50 million or more).
Average process length:
Six months or more.
Examples:
Paul Getty Trust, MacArthur Foundation, and Rockefeller Foundation.
Pension fund
Pension funds accumulate capital to be paid out as a pension for employees when they retire. Some are private and self-regulated, while others are public and government regulated.
Why they invest:
As with endowment funds, pension funds tend to be focused on preserving the principal investment, while also seeking growth for their employees. Given the large capital pools most pension funds represent, they are often ill suited for alternative investments like emerging manager funds. However, some have specific programs focused on early-stage venture.
Typical check size:
$25 million+ (most commonly $50 million to $100 million or more).
Average process length:
Nine months or more.
Examples:
Public: CalPERS, California State Teachers Retirement System, New York State Common Retirement Fund.
Private: Boeing Company Pension Fund, AT&T, Lockheed Martin.
Registered investment advisor (RIA)
RIAs are SEC-licensed advisors to HNWIs. When an HNWI invests in an emerging manager’s fund directly, the HNWI assumes diligence risk. By contrast, RIAs create unique investment vehicles and assume risk on behalf of their clients in return for a management fee.
Why they invest:
Addepar have at least 5% of client assets in alternative investments. Among that group, approximately 85% of RIAs have some investment in VC funds, according to RIA Intel. However, the RIA landscape has been slower to shift toward early-stage venture fund investing — due both to their traditional client base and to the draw of larger asset classes. “From our perspective, there has been limited demand among RIAs for VC funds due to the risk profile in comparison to, say, private equity.” Addepar CEO Eric Poirer told RIA Intel. “Within alternatives, VC is on the higher end of risk and less interesting to someone who is looking to implement a low-risk portfolio.”
Typical check size:
Typically seek 5% to 10% of total fund size; investments are often capped at the SEC’s 10% concentration limit.
Average process length:
3-6 months; typically, not first-close investors.
High-Net-Worth-Individuals (HNWIs) are the most common investors in emerging managers, and often, they are very familiar with the space – perhaps as founders or established VC investors themselves. They understand the risks and the draw because they’ve personally seen it play out from either or both sides of the table.
Read About The Next Component:
Determining the Right Mix of LPs for Your Firm
As you begin to fundraise, you may want to consider many factors.
Read Main Article
Establishing, Navigating and Maintaining LP Relationships
What LP engagement means for emerging managers
Read the following three components to complete the LP Engagement article
Determining the right mix of LPs
Factors to consider as you begin fundraising. Learn more
Navigating LP relationships
Considerations as you begin to meet with limited partners. Learn more
Maintaining LP relationships
Best practices for engaging with LPs throughout the fund cycle. Learn more