Questions to ask before becoming an LP to a Fund

The questions you should ask if you're investing in alternative investment funds (AIFs), whether PE, VC or Public Markets

Hi,

8 months ago, I wrote on how wealth in India is changing and how alternatives are on the rise.

Financialization and Acceleration of India’s Wealth

Now with new avenues to invest, come new frameworks and things to take into consideration.

For the past ~7 years I’ve been investing my own money in the public markets, and almost ~4 years I’ve been part of the professional investing world in one form or another (VC, PE, Public Markets) and I decided to compile all what I’ve learnt into a simple question list, that I’d ask if told to invest in a fund.

So here it goes, let’s begin

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Now, just like how in a business, the mgmt. quality is a top priority, the same holds when it comes to funds

Hence, first set of questions would be about their team structure, a lot of these can be answered if you speak to their ex-employees, other LPs and even the fund manager themselves as well as look into their past

• What’s the Fund Manager’s background and persona?

• How is the top mgmt. decision making? Have they picked winners in the past?

• Specific to private markets; How much time does the Fund Manager / Partner themselves spend on sourcing & their network

• How much time the Fund Manager / Main decision maker(s) spend on the fund (Sourcing deals, Evaluation, Decision Making)

• How is the decision-making process? Who holds the power, what is their track record, intellectual ability, and thesis?

• Do they have an independent board / Investing Committee? Does it have external members?

• Do they have an advisory board / expert network?

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The next step is to look at the fund strategy a lot more closely, afterall, you need to see if it’s a fit for your portfolio while also understanding the fund’s clarity of thought.

• Fund license and structure of the fund; this also determines exit period, regulations, etc.

• What’s the fund strategy? (Deployment time, Exit date, no. of portcos planned, expected return)

• How have they planned their allocation across stages (Or market cap in Public Markets) and sectors?

• Which sectors are their focus and why, how does it fit in my asset allocation?

• What is their strategy for evaluating Founders / Mgmt.?

• What is/are their sourcing channel(s)? (Private Markets)

• How many deals have they done basis a channel? (Private Markets)

• How many deals have they led or plan to lead? (Private Markets)

• How are they rights defined? (Private Markets)

• Have they gotten any exits? (Private Markets)

• What’s their reputation among founders? (Private Markets)

• Process of evaluation? (Private Markets)

• Time to evaluate? (Private Markets)

• Investing Horizon?

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Lastly, if the above two seems to be answered, then comes the fees and the rest of the team; remember funds usually have a smaller team who are aligned with the fund manager’s philosophy (although might have differing views, which helps in decision making)

• How do they approach team building?

• How many people on payroll?

• How do they manage bandwidth of the team / functions of each employee?

• What is the fee structure?

  • In Private markets, the “waterfall” or how the carried interest (fancy word for performance fee) distributed also becomes important, especially the nuance of is it deal by deal (per portfolio company) or overall on the fund

• How are the team members incentivised?

• How likely are the team members to shift / attention at top and bottom levels?

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And that’s it, well for starters.

Remember, it’s your money which they want so be bold and ask these questions, a great fund manager would always welcome the good questions since they’ve pondered on this quite a bit.

Until next time, keep Manifesting Wealth

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If you liked this article, you might like another version where I blend Public and Private markets;

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Disclaimer 1: All above views are purely for educational purposes and are not to be taken as investment advice. Investment or trades taken of any kind based on this are solely the person’s risk and I bear no liability. Please consult a financial advisor before making any investments. All investments are subject to market risks.

Disclaimer 2: The views presented above are mine and not of any organization(s) I work with / am employed at

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