Institutional capital is the next frontier for many emerging managers as they expand their LP base beyond high-net-worth individuals. But unlocking it requires more than just strong returns. It demands that the fund have increased operational maturity, aligned governance, and a focus on transparency.
I recently sat down with Liz Ferry, Head of Operational Due Diligence at StepStone Group, and Graham Pingree, Partner at Cendana Capital, to learn what institutional LPs actually look for when backing a new fund.
StepStone Group manages approximately $179 billion in assets and serves some of the world's largest institutional investors. Cendana Capital has over $2 billion in assets under management and has backed more than 4,800 companies, including over 130 unicorns. Their combined expertise offers invaluable insights for fund managers seeking a better understanding of what it takes to win institutional backers.
Responses have been edited for clarity and length. Full conversation can be found here.
How can emerging managers make themselves more attractive to institutional investors during the fundraising process?
Graham: Ultimately, fundraising is a sales motion, and the best fundraisers are adept salespeople. One key component is listening to your prospective client and reacting to the feedback they're providing. The GPs who build real connections with LPs are the ones who say, "I'm aware of this investor's particular tastes and characteristics, and I'm adapting my story to react to that."
Some GPs have a refined pitch that is fairly broad and scripted. The ones who honestly build connections are those who listen to the person they're pitching and react to what they're being told about what that investor looks for.
What are the non-negotiable characteristics that institutional investors look for in a fund’s structure and operations?
Liz: From an Operational Due Diligence (ODD) standpoint, there are several table stakes requirements. We need to see dual signatures around cash movements. We want to see the firm having D&O and E&O insurance, and well-established segregation of duties between the investment and back office teams for proper checks on key calculations like incentive fees and management fees.
One area we've been engaging most with GPs on over the last 12-18 months is conflicts of interest related clauses in the LPA, predominantly around fees—transaction fees, monitoring fees, affiliated entity fees, and the charging of certain back office fees that should typically be covered by the firm’s management fee rather than the fund.
At StepStone, there really isn't one deal breaker. It's usually the totality of circumstances that informs our decision. We're a solutions-oriented business, so we try to work with our GPs to get to a point where we can move forward.
How should emerging managers think about portfolio construction and potential mid-fund adjustments to their strategy?
Graham: Portfolio construction is critical. I want to know how many deals, typical check size, valuation thresholds, ownership targets, and reserve allocation. However, a portfolio model is necessarily just a guide, since it's a blind pool of capital.
Most fund managers that we back over a three or four year investment period come to us with some refinement in terms of their portfolio construction, usually more marginal adjustments like doing a handful more shots on goal and subsequently reducing reserve allocation by 10-20%.
Ultimately, communication is key. You want to talk to your anchor LPs about what the right go-forward strategy is. Smart, thoughtful LPs recognize that a model is just that, and you have to adjust sometimes based on market conditions.
What are the most common red flags that cause institutional investors to pause or pass on a fund?
Graham: We won't compromise on anything ethical. If we feel there's deception or dishonesty, that's an immediate deal breaker. There's a spectrum from exaggeration to pure deceit, but we look for people who are really authentic and transparent. We spend a lot of time triangulating. Did they do what they said they did? Is their track record representative? We talk to founders and try to corroborate a GP's story, and anytime we hear something contrary to what we've been told, that will immediately stop a process.
Liz: It's simple—be honest.
How do you balance due diligence evaluation standards between very early-stage managers versus more established firms?
Liz: What you can expect from emerging managers from an operational perspective is very different from larger, more established managers. When we acquired the Greenspring Associates platform, we developed "operational alpha" where our ODD team engages 3-6 months before we commit capital to work with emerging managers.
We have a playbook we give them where we share our operational and regulatory requirements from day one. We provide policies and templates to help them put procedures in place. This program has proven very successful and the GPs love it. It's led to board seats even though we're not the largest allocator, and it's resulted in bigger allocations to oversubscribed funds.
For established managers, most of the time they've already put these systems in place. Instead, we might suggest tweaks based on emerging trends we see across our database of 1,200 GPs.
What makes ongoing partnership easier and more transparent between GPs and LPs?
Graham: Data sharing is critical, along with open, honest communication. We tend to be the largest LP in the funds we back and often the first institutional LP to commit, so we work closely with GPs to help put the right processes in place around information sharing. We track a lot of data and have high expectations for how data is shared.
Liz: I would echo exactly what Graham is saying. Get in front of any big news items so we're not reading about it for the first time in the news, especially if it's something negative. Regular, frequent, thoughtful updates and transparency are what we really appreciate.
What advice would you give to first-time managers raising capital in today's challenging environment?
Graham: The biggest advice is patience. It can take a long time to get first and second-time funds off the ground. Don't expect overnight success, and make sure you're committed to doing what it takes, because it's going to take longer than you think.
From a tactical standpoint, qualify your top of funnel—make sure you know which LPs are best suited to back a strategy like yours. For example, if you're raising a $50 million pre-seed fund, going to a large endowment or other huge allocators might represent a structural mismatch because they have to write substantial commitments that might be too large for your fund to accept.
Liz: The most successful managers have founders who want to work with them, and they don't just rely on their pedigree. They are hard workers who grind to get deal flow. They take a long-term view on their business and don't just go for the largest fund for their first fund. Start small, be nimble, get that deal flow and track record, then grow your firm as your track record grows.
Conclusion
For additional insights or to share the conversation with others, you can find the full conversation with Liz and Graham, including a live Q&A from the audience, below.
Curious to hear from a GP’s perspective? Join our next webinar on Thursday, June 26th at 3:30 PM ET, where Exceptional Capital and Velocity Fund will share the strategies behind their institutional fundraising successes and answer live questions from attendees.
Ready to take your fund to the next level with institutional backing? Learn more about how AngelList partners with institutional investors here.
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