How does liquidity profile affect LPs?


The liquidity profile significantly affects Limited Partners (LPs) in venture capital investments. Sophisticated LPs are typically more comfortable with the implications of liquidity constraints, understanding that venture investments are long-term and illiquid. They are less focused on immediate returns and more interested in the long-term potential of their investments. This perspective allows them to handle market dynamics, such as downturns or down rounds in venture investments, more effectively 1.

Conversely, less experienced LPs may prioritize downside protection due to their lower tolerance for illiquidity and potential loss. They might not fully grasp the time and conditions required for venture investments to mature, leading them to miss out on greater returns due to a preference for more liquid and less volatile investments 1.

Moreover, the overall liquidity strategy, including the capacity to make secondary sales or the decision to maintain longer holding periods, can influence both the financial outcomes for LPs and their relationships with fund managers. Experienced LPs might utilize tools like borrowing against their holdings instead of opting for immediate sales, providing them with flexibility to manage investments more strategically 2.

LPs and Venture Returns

Neil discusses how sophisticated LPs prioritize good returns in venture, while less experienced LPs focus more on downside protection. He also explores the importance of liquidity and capacity in venture investments.

The Limited Partner

E11: Neil Datta, The Forbes Family Trust’s Approach to VC | Is there Alpha in Due Diligence?