GPs are experiencing more than ever, a new wave of sensitive, and at times, intrusive requests from LPs during due diligence. While it’s standard to provide background information, track records, and compliance documents during the due diligence process, some recent asks are raising eyebrows and making GPs uncomfortable. These requests are not just intrusive—they could be a sign of deeper, strategic motives that GPs need to be aware of.
What’s Normal to Provide During Due Diligence?
In any fundraising process, there are certain pieces of information that GPs can expect to share with potential LPs:
Background Information: This includes the history of the firm, its investment strategy, and bios of key team members. LPs need this to understand who they’re investing in and the firm’s approach to managing investments.
Track Record: Performance metrics such as gross and net internal rates of return (IRRs), multiple on invested capital (MOIC), and distributions to paid-in capital (DPI) are standard fare. These metrics provide LPs with a clear view of the firm’s past success and future potential.
Portfolio Overview: High-level data on portfolio companies, including sector allocation and a breakdown of unrealized versus realized investments, helps LPs assess diversification and risk.
Compliance Documents: Providing documents like the private placement memorandum (PPM), limited partnership agreement (LPA), due diligence questionnaire (DDQ), and annual reports are a necessary part of the legal and regulatory process.
When Requests Cross the Line
However, in recent months, my clients (GPs of a diverse array of VC funds) have reported a surge in requests that push the boundaries of what’s typical—and acceptable:
LP Contact Information: Some GPs have been asked to provide the contact details of all existing LPs in the firm. Sharing a full list of LPs, especially with their contact information, not only breaches privacy but also raises concerns about the LP’s intentions. Many have been wondering whether these requests are linked to an effort to raise their own outside capital or to bolster their ability to spin out placement agent services. Although providing contact information for one to three LPs to serve as references is normal and acceptable, asking for the entire list is simply not.
Portfolio Company CEO Information: Another troubling request I have been seeing is asking for highly specific and all-encompassing valuation data alongside contact information of portfolio company CEOs. This kind of ask can be an attempt to gather data to fuel an LP’s own deal flow or investment strategy. Providing such detailed and direct contact information can expose portfolio companies to unsolicited communication and even competitive risks.
Why These Requests Are Problematic
These requests are more than just intrusive—they signal potential conflicts of interest and a breach of trust:
Competitive Concerns: LPs might have their own investment arms, or they could be connected to competitors. Sharing sensitive information could inadvertently benefit a competitor or undermine the GP’s position in the market.
Data Strategy: some LPs may use the data they collect to build their own investment strategies, leveraging the information GPs provide to their advantage.
Privacy and Trust: GPs have a duty to protect the privacy of their LPs and the executives within their portfolio companies. Sharing overly sensitive information can damage relationships and breach the trust that underpins successful partnerships.
Setting Boundaries: What GPs Should Never Provide
While GPs should be transparent and cooperative during due diligence, it’s crucial to set boundaries on what information is shared:
LP Contact Information: This should be kept confidential. Instead of providing a full list, GPs can offer references from a few LPs who are willing to speak with potential investors.
Portfolio Company CEO Details: Similarly, find a few founders who are willing to be your advocate and add their contact information to a list of references. Think strategically about who to include in order to create a holistic view of your ability to source, diligence, negotiate, and provide value.
Granular Valuation Data: While sharing valuation methodologies may be necessary, GPs should resist providing highly detailed or company-specific valuation information (e.g., cap tables) that could be misused.
In this difficult fundraising climate, it’s understandable that LPs are seeking more information to mitigate their risks. However, GPs must remain vigilant about the boundaries of what’s appropriate to share. By setting clear limits and understanding the motives behind unusual requests, GPs can protect their firms, their LPs, and their portfolio companies from potential risks. Transparency is key, but so is safeguarding sensitive information in an environment where trust is increasingly valuable.
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