Bad LP Diligence Questions

What questions LPs should NOT ask

Happy Thursday!

I’ve written many articles on diligence over the years, which I’ll include below with the most popular articles in bold. It occurred to me, however, that I haven’t spent time on what an LP shouldn’t ask. Today I’d like to address that head on.

1. Minimum Viable Deck

2. Investor Beware: Feeder Funds

3. Guaranteed red flag

4. The Refinance Assumption Trap

5. 26 questions to ask your GP

6. Top 15 Syndication Mistakes

7. 4 reasons why cap rates are misleading

8. Don’t budge on return of capital

9. Why acquisition fees in a syndication matter

10. Three Pillars of LP Investing:

    1. Execution

    2. Alignment of Interests

    3. Property

11. Asset Specific Posts:

    1. Single tenant net lease syndications

12. 6 Lessons on the Perils of Quick Advice

13. We renovated, but will they come?

14. Filtering using IRR and CoC is dangerous

15. Fees erode more equity than you think

16. Track record audit

17. Minimum Viable Due Diligence

18. Cap Rate Compression Trap

19. The dangers of “trust but verify”

20. 6 reasons to put down a deck

21. Does the pref even matter?

22. 10 reasons why deal flow rules the world

23. Can you teach me to be a GP?

24. Are funds safer than single asset deals?

25. Top 10 misconceptions about syndications

26. LP Risk Mindshift

27. Does due diligence matter?

28. Tariffs and pricing control: why GPs control less than you think

29. Should struggling GPs be raising money?

30. 5 common LP investment biases

31. Top lessons from an allocator & GP

32. LP due diligence guide

33. Should you invest in emerging managers?

34. Return of capital strikes again

35. Last mile LP risk

36. Filtering investments by GP AUM

37. Anti-stock marketing tactics

38. Two concerning trends

39. Never say never

There are levels to phrasing a question which I discussed here at length. That won’t be the topic for today, but I just want to note that you could be asking the right question, but by phrasing it the wrong way you won’t get the full benefits of the due diligence feedback you’re seeking.

Alright, let’s dive in - what are the 6 things you should not ask a GP?

1) References

This is likely the most common mistake. A GP (whether you like it not) will not put you in touch with someone who’s sitting in a bad deal, and to their credit there’s always two sides to a story. What’s even worse is that ~half the LPs who are currently sitting in challenging investments don’t even realize that, and speaking to them would be extremely misguiding.

All to often, the LP will speak to another LP (who might be clueless about investing themselves) and use that conversation as validation to invest. This is a common trap, and the uncomfortable truth about investing is that you need to build up the confidence in your own investment abilities so that you don’t need to depend on others.

To close - speaking to others is great, but the LP you’re speaking with:

1. shouldn’t be personally biased (sometimes the referral you’re speaking to has a personal bias for you to invest, whether that be saving the deal, helping the sponsor, or perhaps even monetary compensation,

2. shouldn’t be “hand picked” by the GP

3. should know what they’re doing when it comes to investing … otherwise you’re simply doing yourself a disservice.

2) Have you ever had a capital call?