Why most LP investments won't 2x your money
Why most LP investments won't 2x your money
A model approach to understanding the search for risk adjusted returns
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Why most LP investments won't 2x your money
Welcome back and sorry in advance for the late night post (I think it’ll be worth it)! 👋
Today I’d like to explore a modeling approach to why investing as an LP isn’t easy.
It should feel hard to find a deal that will double your money over a 5 year period (15% IRR).
Your job as an LP is to have a healthy dose of skepticism - you will pass on many more deals than you invest in. Eventually the hit rate will improve as you get familiar with a sponsor (but don't over allocate!!) and underwriting.
What we’ll do today is make a simple set of assumptions and I’ll show you a model you should recreate from scratch yourself. Then we’ll see what happens from a returns perspective when we start playing around with the variables.
I hope this exercise will help you understand why finding 2x deals for GPs is hard…and why it’ll be hard for you to. Having realistic expectations is really important.
Let’s dive in.