The Different Categories of Limited Partners

When raising your first venture fund, it’s important to understand that there are different categories of limited partners. The limited partner or LP is the financial backer providing capital to venture capital and private equity funds.

They can be divided into categories, each with unique characteristics, investment strategies, and expectations.

→ Single-family office

These are investment firms established by wealthy families to manage their financial affairs, including investments in venture capital and private equity. A typical single-family office prioritizes wealth preservation and growth for the family's future generations. These LPs tend to have a long-term investment horizon. 

→ Multi-family office

Similar to single-family offices, multi-family offices manage investments, but they cater to multiple affluent families. These offices aim to diversify investments across multiple families while offering economies of scale and professional management. Multi-family offices often invest in a range of asset classes, including venture capital, to achieve diversification.

→ Ultra-high net worth

Individuals with substantial personal wealth often like to invest in venture capital or private equity opportunities and other esoteric asset classes. Seeking higher returns, they often allocate a portion of their wealth to these investments. Ultra-high-worth individuals may take a more hands-on approach to their investments or rely on advisors to identify opportunities.

→ Fund of funds

These investment vehicles pool capital from multiple investors, including high-net-worth individuals, family offices, and institutions. Fund of funds spreads investments across various venture capital or private equity funds to achieve diversification. LPs in a fund of funds gain exposure to multiple underlying funds, reducing risk through diversification.

→ Sovereign wealth fund 

State-owned investment funds that manage a country's reserves are often derived from commodities or foreign exchange reserves. Balancing financial returns with economic and strategic objectives for the nation. Sovereign wealth funds take an extremely long-term perspective and aim to influence the economies of their home countries. They tend to need to write very large checks ($50M+). 

→ Endowments,  foundations, and pension funds

Institutional investors, such as universities, non-profits, and pension funds, allocate portions of their assets to venture capital and private equity. Balancing the need for capital preservation, income generation, and long-term growth to support their missions or beneficiaries. These entities often have fiduciary responsibilities, requiring prudent investment strategies. They often also have liquidity requirements to benefit their key stakeholder. 

When cultivating strong relationships with LPs, remember to:

→ Embrace a long-term perspective

→ Prioritize building and nurturing the relationship

→ Offer a unique and valuable perspective