What is LP Investment in CVC (Investment in VC Funds)?

1. What is LP Investment?

LP investment (Limited Partner investment) refers to providing funds as a limited partner to a venture capital (VC) fund. LP investors are not directly involved in the management of the fund and their goal is to earn investment returns.

At FIRST CVC, we support LP investment considerations for CVCs and offer introductions to suitable VCs. If you are considering LP investments, please feel free to contact us.

・Learn more about FIRST CVC’s services for CVCs here

Overview of LP Investment

Below is an overview of LP investment. Generally, the purpose of LP investment is to gain investment returns, but it can also involve joining a startup network or acquiring investment knowledge through VC LP services. The extent of LP services provided by VCs is not published on all websites, and the services vary between companies.

Approximately 65% of CVCs are engaged in LP investments (according to our research), with many CVCs involved in this practice.

• LP provides funds to the fund and enjoys investment returns
• Investment decisions and management are made by the GP (General Partner)
• Risks are limited to the amount invested (limited liability)
• Typically, the fund's lifespan is around 7-10 years

2. Considerations When Making LP Investments

When considering LP investments, some people make the mistake of simply reaching out to a few familiar VCs and making a decision quickly, but this can lead to risky judgments. Without proper research and analysis, the gap between expectations and reality can widen, resulting in reduced investment returns. Therefore, it is crucial to have a clear investment strategy as a CVC and carefully select VCs based on that strategy. Pay particular attention to the following points.

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2.1 Fund Performance

Reviewing fund performance is essential to increase the likelihood of success and minimize risks. While past performance does not guarantee future results, it serves as an important indicator of a VC’s investment capability and management skills. Information about each fund is often not available without direct inquiries, so it is necessary to invest time in a thorough review. A list of 58 VCs with detailed information is available below, which can be useful for your research.

Click here for the VC list

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Key factors to consider:

1. Past fund IRR (Internal Rate of Return) and MOIC (Multiple on Invested Capital)
2. Exit performance of portfolio companies (number and size of IPOs or M&As)
3. Success rates by investment stage
4. Trends in fund size and operational efficiency
5. Comparison with benchmarks (relative evaluation with funds of similar size and domain)

2.2 VC’s Management Policy/Structure

The management policy and structure of a VC are important for maintaining long-term success and consistent investment performance. A strong management structure ensures access to high-quality opportunities and creates value post-investment.

Key factors to consider:

1. Clarity and consistency of investment philosophy and strategy
2. Track record of GPs and their industry experience
3. Team composition and diversity (skills, experience, network)
4. Deal sourcing methods and quality
5. Support and track record for portfolio companies

2.3 Contract Details

A detailed review of the contract terms is crucial to protect the rights of LP investors and maximize their benefits. A well-structured contract aligns the interests of GPs and LPs and helps prevent potential issues in advance.

Key factors to consider:

1. Management fee structure and levels (compared to market standards)
2. Calculation method for carried interest (carry) and hurdle rates
3. Amount and terms of GP commitment
4. Key person clauses and their activation conditions
5. Investment restrictions (investment targets, investment caps, etc.)

2.4 References

Reference checks provide insights that are not available through public information and help you understand the actual operational situation and reputation of a VC. By gathering information from multiple perspectives, you can make more reliable judgments.

Key factors to consider:

1. Evaluations from existing LP investors (especially regarding reinvestment intentions)
2. Feedback from portfolio company CEOs
3. Reputation from industry experts and other VCs
4. Evaluations from collaboration partners in past deals
5. Coverage and mentions in media and industry reports

2.5 Strategic Fit and Gap in Expectations

For CVCs, strategic value is just as important as financial returns. Carefully evaluate the alignment of your corporate strategy with the VC’s investment policy, and minimize the gap between expectations and reality to ensure long-term success.

Key factors to consider:

1. Alignment between CVC’s investment objectives and VC’s investment strategy
2. Potential synergies between portfolio companies and your business
3. Quality and content of LP services offered by the VC
4. Frequency and quality of information sharing and networking opportunities
5. Potential for building a long-term partnership

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3. FIRST CVC’s LP Investment Consulting Service

FIRST CVC operates a CVC community with 300 member companies and offers a service to propose the best LP investment options.

Why Should You Choose FIRST CVC?

1. Clearly understand the differences between each VC
   • Analyze the characteristics of each VC, such as investment strategy, specialties, and past performance
   • Evaluate the strengths and weaknesses of each VC from a CVC’s perspective
2. Support in obtaining references through the CVC network
   • Leverage a wide CVC community to gather multi-faceted information
   • Use feedback from other CVCs’ experiences and evaluations
   • Gain insights based on industry reputation and actual investment experience
3. Addressing CVC-specific needs
   • Support in selecting LP investment opportunities with business synergies in mind
   • Recommend VCs that align with your CVC’s strategic objectives
4. Providing specialized knowledge and know-how
   • Provide the latest trends and industry insights on LP investment
   • Support in the due diligence process
   • Advice on negotiating contract terms

By using FIRST CVC’s services, CVCs can efficiently and effectively make LP investment decisions and find investment opportunities in VC funds that align with their corporate strategies. If you are interested, please contact us via the link below.

Contact us here

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