Find GPs before you find deals
What to do (and what to avoid) when expanding your GP landscape
Happy Friday!
Over the years, one of the most common questions I’ve gotten from LPs is, “Do you have any advice on finding GPs?”
I’ve sat on this draft for over a year now, but I finally decided to set aside some time to dig into what I think is a fairly complicated (and perhaps controversial) topic.
Today we’ll discuss:
Why this GP search is more important than more LPs realize
The best places to find new GPs, and which places you should try to avoid
Switching the LP mindset to “relationship first, investment later”
“This seems like a big effort, is it really worth it?”
1) Why the GP search is more important than most LPs realize
First I’ll mention a few articles that are (more or less) required reading for you to fully appreciate the next few lines:
Whether you’re ready to admit this or not, you’re an LP for one reasons - you’re in search of returns that are above what you can get elsewhere. Many LPs say they’re in the business because they enjoy meeting people, like helping others, enjoy the due diligence aspect of investing … and while all of that may still be true, your investment isn’t into a non-profit venture and your ultimate goal is returns.
I go into this much more in the articles above (particularly in 10 reasons why deal flow rules the world), but you’d be making a massive mistake by assuming that the best deals will just fall in your lap.
While it’s true that this search takes time (more on that later), it’s quite hard (perhaps impossible) to be a good investor without speaking to new people, seeing new perspectives, and analyzing many investment opportunities. I tried to quantify this effort in Minimum LP Investment Size, where I essentially explain that small check sizes don’t make much sense for the vast majority of LPs due to the effort involved in finding the right deal.
To close, I think most LPs spend a lot of time looking at the deal’s financials, reporting packages (after cutting a check), or perhaps asking whether the GP has made a capital call prior to investing (I’ll try to post soon on why I don’t think this is a great practice) and this essentially misses the biggest driver of long-term results: who you’re investing with.
In private real estate, the GP matters far more than the spreadsheet - this is why I explicitly put the execution pillar as the most important pillar of LP investments. Two sponsors can buy similar properties in the same market and end up with completely different outcomes based on underwriting discipline, asset management, and how they handle things when the plan doesn’t go perfectly.
While it’s true that professional allocators have many existing relationships, they also understand that seeking out alpha in a marketplace that’s private takes an outbound effort. They’re in the business of finding the best deals, and you should take that same mentality - finding anything great takes effort.