LP Risk Mindshift

Welcome back and happy Wednesday!

I tweeted this over a year ago, and was a bit hesitant to write on the topic until I had a larger sample size … but we’ve arrived.

A year has gone by and I’ve advised on a ton more cases that are similar to the case above. I’ve learned that my hunch above was correct … but I also have some thoughts as to why this might be the case.

Today, I’d like to dissect the types of LPs and explain why a risk mindshift is in order.

Announcements (article continued below):

• Latest **article: Top 10 LP misconceptions about syndications - **all the most common “I wish I knew x” comments I’ve heard from LPs, in one place

• **April LP Cohort: **I have 1 more seat here. Review 4 deals with me and a small group of other LPs to learn what to look out for in deals. Please reply to this email if it’s of interest.

• **LPs on GP-LP Match have now gotten 76 deals for free and the platform is at 1,461 verified LPs. **If you’re an LP or GP join here in under a minute.

Generally speaking, there are three types of LPs:

• Working professionals (CPAs, attorneys, doctors, etc. - typically W2 employees)

• Successful entrepreneurs (own a business or sold a business)

• Investment professionals (i.e. they invest for a living on behalf of a company, pension fund, etc.)

The common thread across all 3 is simple is that they enjoy looking at syndications, want to participate in the space, and (ultimately - let’s be honest) are in search of a higher yield on investments (otherwise it doesn’t make sense to take on the risk and illiquidity). In the finance world, we like to say that they’re hunting for alpha.

While their goals are similar, professional investors are different from the first two categories for two big reasons:

• Investment professionals understand the value of deal flow

• Once they have the deal flow (either themselves or through their employer) and see a ton of deals come across their desk, they naturally develop a set of principles to dissect these investment opportunities

Since investment professionals do this for a living and understand what to look for, their “risk” levels are well calibrated and their job becomes staying true to their principles (not easy by the way). Today we’ll dissect why I think this isn’t the case for the working professional and the successful entrepreneur.. and what (in my humble opinion) I think you should do about it.

Working professionals (CPAs, attorneys, doctors, etc. - typically W2 employees)

• The risk problem:

• You're accustomed to environments characterized by strict professional standards and (at least somewhat) clearly defined accountability … however, syndication sponsors vary greatly in their professional rigor

• The solution:

• Don’t just assume people are honest, lead with verification.. and only then (slowly) begin to trust

• I’d recommend reading the dangers of “trust by verify” and going in assumptions as an LP for a deeper explanation

Successful entrepreneurs (own a business or sold a business)

• The risk problem:

• You've built your wealth by taking calculated risks, often directly influencing outcomes through hands-on decisions and timely course corrections

• As a passive LP, this control is transferred entirely to the GP once you wire that check - you must trust someone else's risk management, judgement, attention to detail, and so on

• The solution:

• The only thing you can do (in most cases) is “frontload” your risk mitigation by doing superb due diligence up front and monitoring during the investment period. This is what makes LP investments inherently different from what you’re used to as an entrepreneur - and you should allocate/diversify accordingly as a result.

If you take a random sample of 100 syndicated deals that are available to retail investors, it’s likely not an exaggeration to say that half shouldn’t make it past 10 minutes of diligence. This is precisely why “reps” & deal flow are so important - you get to see a lot, learn, and slowly develop a “taste” for your own set of reasons to put down a deck.

As always, I hope this was helpful and I look forward to your feedback!

I advise LPs on existing and potential positions and write articles here weekly on what I see in the marketplace that could help you invest better. You can find me on LinkedIn or Twitter.

Whether you’re an LP, want to learn to become one, or affiliated with LPs (GPs, Attorneys, CPAs, Financial Advisors) I hope you’ll consider subscribing and sharing this post to help others make more informed investment decisions.

When you’re ready, I could help you in 3 ways - simply reply to this email if one is of interest:

• Limited Partners:

• ***GP-LP Match - ***a simple way for you to get more deal-flow that matches you precise LP parameters. You can join here in under a minute. I’m behind on verification for LPs so please ping me privately to expedite once you sign up.

• Potential positions - you’re considering investing and need an independent opinion

• Existing positions - there’s a lack of communication, you’re concerned about fraud, or perhaps you got a capital call request and you’re not sure how to proceed. I have also helped LPs with a “post-mortem” analysis on deals that didn’t work out - it’s important to learn these lessons as opposed to just blaming the GP.

• LP Course - review 4 separate memos in 4 weeks together with me and other LPs to learn how to find good LP investments.

• LP Topics Seminar** - **an ongoing biweekly 1 hour meeting with other LPs where we'll go over investment decks, capital calls, distressed situations, and modeling. This is meant to provide a deeper look into existing LP investments. Please reply to this email if you’re interested.

• ***LP Community - ***free 2,800+ member LP Investor community on Twitter

• ***Find GPs ***in unique asset classes/geographies on my monthly intro post (see LinkedIn’s post as well for more)

• General Partners:

• Deck review - I’ll look over your marketing materials from the perspective of an LP and provide slide by slide commentary to improve your pitch

• Investment review - I’ll provide independent feedback on an opportunity you’re pursuing

• Capital call advisory** - **you suspect that you’ll need to make a capital call, but aren’t sure how to proceed or communicate the message.

• Other - anything from waterfall/fee advisory to disagreements between co-GPs on the proper path given a set of circumstances

• General Consulting: modeling, strategic advisory, underwriting training, etc.

If you’d like to speak on the phone, you can reach me at aleksey@centriocapital.com.