Can LPs Ask Too Many Questions?

Question

A PassivePockets sponsor recently stopped accepting capital from our members because answering their due diligence questions was taking too much time away from operating the business. The sponsor also returned one member’s investment.

It’s not something I’ve encountered before, and I’m curious how others view it.

I understand that an operator’s primary job is to operate. Investors can ask repetitive, highly detailed, and time-consuming questions. But when you choose to raise outside capital, isn’t answering those questions part of the job?

PassivePockets is designed to give LPs a place to compare notes, ask difficult questions, and conduct deeper due diligence together. Naturally, that means operators on our platform may receive more sophisticated and detailed questions from our members.

So where is the line between reasonable due diligence and too much? Has anyone seen an operator stop accepting capital or even return it because of investor questions?

I’d love to hear perspectives from both LPs and sponsors.

G. Brian Davis · Answer

I can understand an operator getting frustrated if investors are asking the same questions over and over, but if you're taking people's money, answering reasonable due diligence questions is part of the job. I'd much rather have investors ask tough questions before they invest than have them discover something later that they didn't understand. We see this in our own co-investing club too. When we're looking at a deal, our members ask a lot of questions, and sometimes those questions uncover things that need more explanation or digging into. That's part of the process. The operator doesn't have to agree with every question, but I think being willing to answer them says a lot about how they handle investors. At the same time, I can understand why an operator might decide that a particular investor isn't a good fit. But returning someone's money simply because they asked a lot of questions would make me want to understand exactly what was being asked and how the sponsor responded.

Dan Handford · Answer

Exactly. A structured third-party review can be far more demanding than individual LP questions, which is why I view the response process as an operating capability, not a distraction. The sponsor may not answer every request in the investor's preferred format, but the firm should have organized source documents, named owners for each diligence category, a response log, and a process for escalating material questions. If ordinary investor questions overwhelm the team, that may reveal a capacity or systems issue worth understanding before capital is accepted.

Chris Seveney · Answer

I will bet that sponsor has never had to go through a third-party due diligence report from factright, Mick Law or Buttonwood. When we did our factright report on both the company and the fund the excel tab was about 10 tabs each with 10-50 questions on each tab.

Dan Handford · Answer

I would separate reasonable due diligence from requests that effectively redesign the sponsor's reporting or operations. LPs should be able to get clear answers about the business plan, assumptions, fees, conflicts, financing, downside scenarios, controls, and reporting. A sponsor can reasonably say no to custom reports or involvement in day-to-day decisions. The cleanest solution is expectation setting: a thorough data room, a defined reporting schedule, an FAQ that grows with repeated questions, and a clear process for material follow-ups. Returning capital may be appropriate if the sponsor concludes the investment is not suitable for that person, but the quantity of thoughtful questions alone would not concern me. An inability or unwillingness to answer material questions would.

Stuart Udis · Answer

@Alexis Pugin This could be PPM/Offering materials with major holes or LP's who are not qualified based on the questions that are being asked. Difficult for anyone to weigh in without reviewing the specific GP's materials and evaluating the questions and qualification of the prospective LP's that were interacting with the GP.

Brian Burke · Answer

What is a syndicate sponsor’s role if it is not to answer questions from current and prospective investors?

People often confuse managing syndicates as a real estate business.  It is not.  It is a financial services business.  Your competitors are not real estate investors, your competition is other financial service firms such as banks, investment firms, and conventional/retail investments.  Because, no capital = no real estate to invest in.  Don’t bite the hand that feeds you.

I have a full time employee whose only job is to answer investor questions.  When questions are not simple/routine he sends the questions to me and I personally answer them.  I spend a significant amount of time doing exactly that. Sometimes I abandon my objectives for the day (at the last minute) and spend the entire day answering questions that were sent to me that morning.  Not just one-word answers but well thought-out complete and detailed answers.  Why?  Because that’s why we are here.

I can see a case for rejecting an investor if the nature of their questions makes it apparent that the investment is unsuitable for them.  But I wouldn’t consider the quantity of questions alone as disqualifying.  I had one prospective investor recently that emailed about 15 questions, which I answered.  Then a month later, 15 more. I thought that would be it, but no…another month later, 10 more, then another 5 a couple weeks after that.  Continued answering them all.  Then, he subscribed.  Some may say he will be the biggest pain in the neck—but I disagree…I’ve seen this both ways and found no concrete correlation between their DD and how they act once in the deal.  Perhaps other sponsors have a different experience.  Or perhaps their own inadequate reporting forces investors to become a pain in the neck, but I digress.

But investors:  here is what IS annoying.  There is a clear trend developing where investors are sending obviously AI generated questions, where it’s clear that they uploaded the offering docs to a chatbot and prompted it to generate a list of questions for the sponsor. In nearly every case, they are the dumbest questions or just simply looking for “gotchas”.  I answer them anyway, even though I doubt the prospective investor really cares about the answer because no human would ever ask it.  Please ask your own questions, or just tell us that you are fine with us uploading your AI questions to our AI to answer your AI.  Senseless.

A lot of sponsors are struggling to raise capital, and yet I’ve raised nearly $100 million in the last year or so…so the recipe works. And if sponsors want to reject investors for asking questions, fine by me. They are welcome here.

Chris Seveney · Answer

first and foremost i would say it is very important for lps to ask a lot of questions to make sure they understand what they are investing in. as a gp for the past 8 years have there been investors that we have told this investment is probably not the right fit because of the type of questions and information they wanted and how often they wanted the information? absolutely!

typicalky though it's not as much due diligence but expectation setting:  We are very clear on what information and reporting we provide but when someone wants as an investor their custom reporting or "inside information" that is not something we are gonna provide as if we did that for every person that asked for it we would spend all week providing reports vs doing our job

Henry Clark · Answer

OP

A.  what are examples of questions that did not get responded to or cause communication to cease?

Or what were the magnitude of questions?  Or what questions outside of a normal deck were being asked?

Did the LPs educate themselves before in deal analysis or did they use this GP to learn basic deal analysis?

B.  Please provide:

What is Passive Pockets supplying for a deal checklist?  What is each LP bringing to the table as their checklist?

C.  I have customers who within 5 minutes I know I don’t want to do business with.  The same holds true for a GP.  From that GPs perspective what caused the return of funds?  Not your perspective but theirs?

D.  Once a deal starts a GP is not legally required to communicate with you, supply financials or take your advice.  If an LP up front starts “suggesting” financing, color schemes, contractors, different marketing studies, etc.  It’s best to lose that LP up front.  Which issues triggered the GP in your groups discussion from cutting the discussion off?

The above will guide the response to your question.  Forget who is right or wrong.