A Guide for Impact Investment Fund Managers

A step-by-step resource to creating and managing a private equity impact fund

Preparing for LP Due Diligence

During the Go-to-Market phase, a GP begins to contact potential LPs, who will then evaluate whether they will proceed to the due diligence stage. Before investing in a fund, LPs need trust that the fund management team can deliver on the promises made during the marketing process. During the due diligence period, LPs assess a fund’s operational competence, ability of the fund management team to follow through on its investment strategy, and whether a GP will be a consistent and professional partner that communicates effectively. An LP’s decision to move forward into due diligence is very significant, signaling that the LP’s core investment team believes in the fund and is willing to devote resources to validating the fund’s strategy and design. Even as some LPs proceed to due diligence, a GP should be talking with multiple investors simultaneously, getting their feedback on fund strategy and design in terms of both substance and style. Every LP will have its own process, but some common activities during due diligence include:

  • Validating the investment and impact thesis;
  • Evaluating their strategy for achieving impact;
  • Assessing the experience of the team;
  • Visiting fund offices, investees, and pipeline;
  • Analyzing fund economics; and
  • Assessing fund operations (e.g., back office, hiring).

If a fund passes due diligence screens, capital commitments from LPs will follow, leading to the fund’s first close. A first close should give the fund enough capital to make its initial investments and cover operating costs. Fund managers should have LPs in mind for their second close, ideally having these investors engaged, and even interested in investing, by the time of the first close. The second close typically occurs within one year of the first close.

GPs should take particular note of the importance of professionalism and prioritize thorough communication, appropriate staffing, and consistent internal governance and processes. Important elements that demonstrate fund professionalism include:

  • Reporting in a consistent and thorough manner;
  • Embodying a learning mentality and receiving critical feedback well; and
  • Demonstrating operational and strategic competence.

More than half of LP respondents to the GIIN’s 2017 Annual Impact Investor Survey viewed impact GPs as slightly behind traditional GPs in terms of their professionalism and transparency. However, this perception is also changing: the vast majority (roughly 90%) of LPs indicated seeing an increasing abundance in 2016 of professionals with relevant skillsets and greater abundance of market research and data.[1] Newer fund managers should focus on developing their operational competency early so that they can prove to investors that they have the capacity to manage ever-larger investment sizes and remain competitive, demonstrating the expanding skillsets expected of impact investing professionals.

[1] Mudaliar et al., Annual Impact Investor Survey 2017, xii.

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