0100 Conferences and 3TS Podcast: Episode 2

The World of Limited Partners


With Pete Flynn, Founder and CEO Candela Capital and Elbruz Yilmaz, Investment Director 3TS


Here is the second episode of the 0100 Conferences and 3TS podcast. Below, you can find the key messages that Pete Flynn, Founder and CEO at Candela Capital and Elbruz Yilmaz, Investment Director at 3TS Capital Partners discussed about the world of Limited Partners, aka LPs, and the art of fundraising.

Candela Capital is a boutique placement firm focused on private equity and real asset distribution, mainly in Europe. Examples of recent mandates include fund raises in French growth capital, oil & gas, timber, secondaries, UK low-mid market buy outs, life science and VC. Pete Flynn has more than 30 years of experience in fund management and founded Candela Capital in 2003, helping fund managers from small to mid-size raise their new funds.

Q: Could you give us some background about yourself and Candela Capital? 

A: I started my career in the City of London joining Rothschild Asset Management as a young man just out of university and I relatively quickly moved to the institution of asset and wealth management where I stayed until I set up my own business. When I went into the alternative side in 1999-2000, it was pretty clear to me that most of the distribution that was done there was done rather on a transaction basis, while most of my professional career distribution was done on a relationship basis. At Candela, the preference has always been to stay with clients for two or even three fund iterations until they had the size to bring the distribution capabilities in-house. It has worked pretty well and we are excited that the model we set all those years ago still seems relevant in the marketplace.

Q: What do LPs look for in GPs and fund managers?

A: I think that the world of LP’s is more difficult than most people think looking from the outside. Writing a seven or eight figure sum for people that they might not know that well is a tough gig. They want to engage with a team that is made up with individuals of the highest reputation ethically and professionally. And that team then invests in a process of added value in whatever region or stage of investment that might be, that obviously can generate added value and it is likely to be persistent. Those are the three things, I don’t think it’s overly complicated. It is however super difficult to consistently deliver both from the LP point of view and from the GP point of view.

Q: How do LPs find fund managers or do fund managers find LPs?

A: The large investors within the private equity world are very well resourced and can map out the whole market, understanding who is doing what in which area, who is generating consistent and persistent returns in those areas and which teams are the ones that stand out with professionalism and higher standards. Smaller investors like pension funds and insurance companies, whilst deploying very significant amounts of assets, might not be as well-resourced, so they will just cut out the smaller end of the market and concentrate on the very best of the very largest funds. Even smaller organizations like specialist investors, corporates or family offices, will focus more on areas they are enthusiastic about in terms of stage, size and geography and might be more receptive of inbound interest rather than going out and identifying the groups they want to invest in. Also, if they have relatively mature portfolio, overtime they won’t make a lot of changes, they will look to add only one or two new relationships a year and they will seek to get to know those relationships overtime.

Q: What would you advise first-time fund managers when doing their first fund raising? 

A: First time funds are tough for everyone to raise. The easiest way to do it is to have a team that will start in a large, very successful organization and you spin out as a team within a very specific strategy.

That way the team has a proof of concept of working together, track record in their area and investor relationships. This is not an option for some people, but if it is, it should be plan A.

The other option, while identifying a great investment opportunity and bringing a good team together, is to raise money from one or more of the following three categories of investors: a catalyst investor, a mission re-investor and people that you already know. The catalysts investors are those mostly set up by governments (in Europe e.g. EIF, EBRD etc.) and it is beneficial to have their commitment first.

The mission re-investors are those who want to support a strategy within a field they know well, and which has made them money before (e.g. tech entrepreneurs who have made a lot of money in that area already). The third group of people are those you know, who trust you and preferably for whom you have made money for before. Unless you are lucky and hit the right people at the right time, institutional investors are not likely to invest in first-time fund managers but will gladly follow you and potentially join in fund II or III.

Q: What are some trends in the industry? Are all LPs talking about ESG now?

A: Private equity has really performed over a long period of time as an asset class for large LPs, compared to the hedge funds, the infrastructure, the public equities and bonds. There is still more money coming into this market and a high percentage of the available cake is being taken by the really big funds that have become platform investors. You can go to them for the big buyouts, the secondaries, the private debts, infrastructure, real estate and so on. One of the trends is narrowing down the number of relationships that the big investors have been having and it makes a lot of sense for them to concentrate, once they trust an organization.

There is an increased understanding that the real value is driven through technology. You want to make sure that you’re investing in the part of technology that gives you the steepest value gradient. I think people are nervous that around the series C and series D it is difficult to make significant money, as so much money has already been deployed and we’ve seen the trend of overvalued tech companies either not driving their profit potential or having trouble with their basic economic model. Series C and series D investors won’t see the returns the seed, series A and series B investors have, so people are coming down to smaller funds and earlier in the process. The problem for the large assets allocators is that it’s very difficult for them to deploy money efficiently in that space and there is a real struggle now for them to identify how do they take advantage of the value that the tech investing is driving and how many relationships they have for that.

You also mentioned the ESG which is absolutely part of what all stakeholders are looking for. Everybody’s talking about it and people are implementing that in different ways. Many organizations are also trying to align the values they hold with the values they expect the fund manager or GP to employ. They are increasingly looking at diversity, the gender ratio and educational balance. If you can deliver ten times your money as a homogeneous group who doesn’t pay attention to ESG, you can probably get away with it. But if you are up against somebody the same size, same stage and same geography, who can deliver top quarter returns as well as you, but who also pays attention to ESG and diversity, you are going to lose out for the investment.

Q: Do you have any suggestions on blogs, newsletters, books or reports to read to understand the LP world better?

A: The more I go out and talk to investors and the more I spend time with people on the road, the better informed I am. There are some shortcuts, but my experience is actually to just get out there and talk to people, be generous with your time and people will trust you and share their views with you. The best people tend to be relatively straightforward and relatively open about what they do because they know it’s very difficult to replicate.