What you Should Look for in a General Partner as a Limited Partner.
Selecting a general partner (GP) for your next investment opportunity is one of the most important decisions you can make as a limited partner (LP).
LPs carry a significant financial responsibility while having little say in the daily running of the operations, which they entrust almost entirely to the GP. To do so comfortably, they must find an individual with whom they have absolute trust to make the right decisions.
The success of the investment lies heavily in the expertise and the sound judgment of the general partner. LPs and GPs should also be able to build a fruitful relationship. Therefore, it is essential to know what to look for in the individual you choose to carry this responsibility.
Criteria vary heavily depending on the venture itself, but also the limited partners’ objectives and priorities. Nevertheless, here are some elements you should take into consideration while electing a general partner for your next business endeavor.
Professional Background
The selection of a general partner relies heavily on the human factor.
Each venture is unique, with its specific challenges and opportunities. Besides, potential candidates for GP have different backgrounds, both in their professional careers and in their personal qualifications, which may or may not be a good fit for the investment opportunity under consideration.
When picking a general partner, limited partners should consider the past deals potential candidates took part in. They should have an established track record with the type of deals limited partners are interested in.
Past successful deals constitute, without a doubt, an essential criterion of selection. However, you should not neglect to examine failed ventures. They are an excellent way to identify potential GPs weaknesses. More importantly, they should have been a factor of growth and self-examination for the candidate. If the contender made the same mistakes several times, it should serve as a red flag.
Limited partners should also examine the team and network general partners may have built over time, especially their managerial team. Long-standing relationships – whether they are with other limited partners or team members - are often a good indicator of the GPs' trustworthiness and competencies.
Area of Expertise
Business ventures often require specific knowledge about different sectors and geographic locations. Depending on the limited partners' priorities and desires, it may be necessary to turn toward an individual with an extensive background with the type of assets and investments LPs are considering.
Limited partners often seek to establish a balanced portfolio which may require expanding their investments beyond assets they have personal experience with. As the primary decision-makers, general partners should bring in external knowledge on niches that may benefit LPs. For example, they may have an interest in funds located in emergent markets or specific industries.
Recognizing how and when to take advantage of opportunities and identifying the risks inherent to any investment typically demands a certain familiarity with the rules and regulations in place in local markets.
Communication Style
Limited partners have little say in the daily running of operations. Most appreciate taking the backseat since passive investments allow them to focus on other priorities such as a full-time job. It is also an excellent way to balance your portfolio with more diverse assets without spending the time and energy expending your knowledge into specific sectors. However, this position can prove frustrating for individuals used to take an active part in managing their assets.
If being informed on how and when the funds raised by the limited partners are used is a priority, then you should turn toward a potential general partner with an open communication style. Limited partners should make clear from the get-go that they are looking for frequent reports, including an exhaustive explanation regarding the evolution of the deal, the decisions that were made, and so on. On the other hand, some LPs prefer to focus on results rather than the process.
You will need to find common ground on the frequency and media to be used to communicate between LP and GP.
Investment Strategy
Each potential general partner has their favored investment strategy, which can often be identified by examining their track record.
Some GPs may lean more towards investments with a higher risk factor, but which may provide higher returns. Others may be more cautious and have a more conservative approach. As a limited partner, it is essential to discuss your objectives with the candidates as GP to decide if your views align and avoid any frustrations down the road.
Limited partners should also inquire about the contenders’ process to source deals. General partners should explain the systems and tools they use to identify business opportunities for the best price, as well as their strategy for the short and the long term, how they mitigate risks, and so on.
Although excellent business sense and good instincts play an undeniable part when choosing your next GP, they should also operate under measurable parameters.
Fees
Management fees and their allocation have become a sensitive point when it comes to private equity funds. They should cover the operating expenses of the engagement but also serve as an incentive for the GP to go above and beyond to protect the LPs’ interests – with the inclusion of a performance fee, for example.
Although some LPs may be tempted to negotiate management fees down, it could become counterproductive in the long run. Less experienced GPs may be willing to accept lower fees in exchange for the opportunity. Limited partners and general partners need to come to an agreement on the appropriate level at which to set the ongoing fees.
Conclusion
Selecting a general partner is often a difficult task for limited partners since it requires significant confidence in the candidate both on a professional and human level. To find the right person for the job, LPs should not hesitate to ask difficult questions to verify whether or not their interests and business views align with the task at hand.
