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.

Mark Robertson · Answer

I think there are two separate issues here.

An LP can certainly become unreasonable by asking questions already answered in the offering documents, repeatedly requesting the same information, expecting custom reporting, or trying to participate in operating decisions. A sponsor is also entitled to decide that an investor's expectations are not a good fit and decline or return the capital. In some cases, that may be the best decision for both parties.

From the sponsor's perspective, time allocation matters. Spending 15 minutes with a sophisticated investor considering a $1 million commitment and spending an hour explaining the basics to a new investor considering $25,000 represent very different returns on the sponsor's time. That does not make the smaller investor less entitled to honest answers, but it does affect how a sponsor structures its investor-relations process. If a sponsor chooses a $25,000 minimum, however, educating and supporting investors at that level is part of the business model it selected.

Material due diligence questions do not become unreasonable simply because answering them takes time. Before investing, I want to understand the sponsor's realized track record, including troubled deals; the complete fee structure and conflicts; debt maturities and extension provisions; capital-call and dilution terms; downside assumptions; and how investors were treated when prior investments fell behind plan. Raising outside capital comes with an obligation to make that information reasonably accessible.

Investor groups can help by consolidating and deduplicating questions, requiring members to read the data room first, and maintaining a shared Q&A so the sponsor does not answer the same question twenty times. The sponsor should have organized documents and a process for escalating questions that uncover something material.

Returning the investment by itself would not concern me nearly as much as the reason for doing it. Were members requesting endless custom analysis, or had they uncovered material background or performance issues that the sponsor did not want to address? I would want to see the actual questions, responses, and timeline before reaching a conclusion.

LPs should not expect operating control or unlimited access. They should be able to understand what they are buying, how the sponsor gets paid, what can go wrong, and how that sponsor has behaved when things went wrong before. If organized, relevant questions overwhelm the team, that is useful information about the firm's investor-relations capacity before the next difficult period arrives.

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.

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.

Evan Polaski · Answer

This is clearly a nuanced issue.  Yes, sponsors should answer questions.  And yes, sponsors can choose what they want to answer or not.

I can see a few scenarios that may have prompted this, and my guess is the likely one that I see several groups struggle with is: they have a group of institutional investors that can fund their deals.  They know they get better economics as the GP by going to retail accredited investors, only to find out it is a totally different business. And is an investment of both time and money to get up and running.

Chris Seveney · Answer

@Alexis Pugin - They are for the BD / RIA space and the sponsor doesn't own the report either. The reality is a sponsor can say or answer a question in a fashion that may not be accurate or not be in full context.

the simplest thing to do is require sponsors to get track record verification reports, they cost around $5k per fund and if a sponsor is making the returns they say they are then dropping $5k is nothing for them. There are plenty of companies that do this (we had them done) and they basically review the investors and distributions to investors (and sponsor) to see if these investor are getting x% returns

i would guess if passive pockets required this the number of funds on the site would drop substantially pretty quickly though...

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.

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

Dominic Mazzarella · Answer

I think a lot of this comes down to expectations being set before money is wired. LPs don’t get operating control or unlimited access, but they should be able to understand the sponsor’s track record, debt structure, reserves, fees, capital-call language, reporting, and what happened on prior deals that missed the plan. Those are normal diligence questions.

From my own owner/operator background in mobile home parks, self-storage, and smaller commercial, I’d rather have a capital partner ask hard questions upfront than find out later that we viewed risk differently. The cleanest relationships usually have organized materials, clear reporting, and a very clear line between major investor-level decisions and day-to-day operating decisions.

Can LPs Ask Too Many Questions?

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