LP RELATIONS · SERIES A · ARTICLE 03
Your LPs Are Not Asking More Questions Because They Are Difficult. They Are Asking Because the Standard Has Changed.
Institutional LPs and sophisticated strategic buyers have converged on the same governance questions. The funds that understand this shift and prepare for it proactively are raising capital and achieving exits on materially better terms.
Three years ago, governance questions arrived at the DDQ stage. Today they arrive in the first substantive meeting. Not as diligence. As a filter. If a GP cannot describe its LP obligation register in that first conversation, the LP has already formed a view. The rest of the meeting is confirmation.
Institutional LPs have learned, through direct experience with governance-poor funds, that the questions asked early correlate strongly with the outcomes experienced late. A fund without a documented regulatory posture during fundraising is unlikely to develop one during the hold period. The LP is not looking for perfection. Rather, they are looking for evidence of intention.
The funds that demonstrate governance quality before they are asked for it are raising capital faster, at better terms, and from a more durable LP base than those that scramble to assemble it in response to diligence.
What Institutional LPs Are Actually Measuring
The ILPA DDQ has become the de facto standard for LP governance assessment. Its most recent iteration asks not only about what the fund has, but about when it was built and how it is maintained. A compliance register assembled in response to the DDQ looks fundamentally different from one maintained for three years. LPs know the difference because they have seen both.
The MFN cascade is a specific area of increasing LP scrutiny. Most funds have granted MFN rights to multiple LPs without fully mapping the cascade implications. A new LP admitted on terms that trigger
MFN rights for existing LPs creates obligations the GP may not have fully traced.
I have seen this become a significant issue in re-up conversations. The LP is not angry about the MFN. They are concerned about what the failure to map it says about how the fund manages its obligations generally. That concern is hard to address in a meeting. It is easy to address by having done the work before the meeting.
The Convergence of Buyer and LP Standards
What is notable about the current environment is not that LP standards are rising. Rather, it is that they are converging with buyer standards. The governance questions an institutional LP asks at re-up are materially similar to the questions a sophisticated buyer asks in week two of a sale process. This convergence is not coincidental.
For mid-market GPs, this is genuinely good news, if they see it clearly. The work required to satisfy one audience satisfies both. Build LP-quality governance infrastructure during the hold period and you are simultaneously building exit-quality governance infrastructure. The investment is made once. The return is collected in two places.
Why Some Funds Lose Re-up Decisions They Expected to Win
Re-up decisions are increasingly governance-driven. A fund that has returned capital but managed its LP relationships reactively, communicated late, and scrambled to answer governance questions in the DDQ is in a weaker re-up position than a fund with lower returns and stronger governance practice. That is an uncomfortable sentence. It is also true.
The funds that earn re-up decisions from institutional LPs are not always the highest-returning funds. They are the funds that demonstrated, over the course of the relationship, that they operated at an institutional standard. That standard is achievable for mid-market GPs. It requires intention and consistency, not infrastructure.
THE PRACTICAL TAKEAWAY
Build LP governance infrastructure before the fundraise, not during the DDQ process
Map your MFN cascade before admitting a new LP.
The governance questions institutional buyers and institutional LPs ask are converging. One investment in governance quality serves both audiences.
Re-up decisions are increasingly driven by governance quality, not returns alone.
START HERE
Not sure where to begin?
If you are eighteen months from an exit and have not stress-tested your governance posture, this is where to start.