managing partner at Quest Fund Placement
founding partner of Rede Partners
associate in the London office of Debevoise & Plimpton
co-founder of Asante Capital
managing partner at Cebile Capital
partner at Eaton Partners
You could be forgiven for thinking it’s easy to raise a fund in today’s environment; after all, private equity funds raised a combined $411 billion last year, the most since 2008.
But it’s not always straightforward, and some fund managers have a much tougher ride than others. Private Equity International asked some of the top experts in fundraising and fund formation for their advice on getting your fundraise off the ground – or back on track.
You’ve misjudged the timing of your fundraise
“You need to turn the whole thing into a premarketing exercise, and use the opportunity to engage with pre-qualified potential new LPs,” says James Coleman, managing partner at Quest Fund Placement.
“If you need to spend more time in the market than you perhaps wanted, you may as well build some new relationships. You may often find that these new relationships will be the fastest to commit.”
Adam Turtle, founding partner of Rede Partners, suggests adjusting your proposition to go back to market with a more interesting story.
“Focus on trying to sell something or do some deals. If, for example, you are out of capital, try to do a deal with a co-investor. That gives you something to talk to investors about.”
The main lesson: really consider whether the timing is right, and don’t be swayed by high volumes of LP capital sloshing around.
“If you raise two funds very close to one another the chance is very high they’ll be in the same vintage cluster,” says Mounir Guen, founder and chief executive of MVision. “If that vintage cluster is strong that’s terrific because you get two upside funds, but if it’s weaker you get two negative funds back to back, which is a dealbreaker for most investors.”
A major LP wants to put a provision in its side letter that you’d rather the broader LP base didn’t elect — do you have to offer it around?
This depends on how the Most Favoured Nations clause is constructed, according to John Rife, an associate in the London office of Debevoise & Plimpton. MFNs are often size-based, meaning LPs can only elect the benefit of provisions granted to LPs with commitments equal to or less than their own.
“If the fund has such a commitment-based MFN, and if the major LP is the largest (or one of the largest) LPs, the sponsor may be comfortable granting the side letter provision on the basis that it will not be capable of being widely elected by other investors,” Rife says.
If the GP really only wants to offer these provisions to one specific investor, it should consider whether there’s a non-contractual way to meet the LP’s needs.
“In an industry that is focused on building long-term partnerships, a non-contractual commercial understanding is often as valuable as a legally-binding side-letter provision.”
A top dealmaker leaves halfway through fundraising and investors are nervous — how do you reassure them?
Turtle identifies two areas investors will worry about if a key dealmaker leaves: is this person the “investment engine of the firm”, whom you will struggle to make good investments without; and does the departure say something negative about your culture?
To address the first, showcase the remaining team members’ capabilities, analyse their roles in completed deals and demonstrate a strong continuing pipeline of opportunities.
For the second, reassure investors the firm is still a positive place for the remainder of the team.
“Obviously it’s disappointing when someone leaves, but it can be a good thing because it frees up economics for other people and can create space for others to step up,” Turtle says, adding those remaining may even be more motivated after the departure.
Don’t ignore the situation, says Coleman.
“What you have to do is work out as a group what that means, reinvent yourself and then market the ‘new you’,” he says. “Our approach is reset, go and see your biggest LPs, then your smaller LPs, then new investors and explain to them the reset.”
You should do everything possible to negotiate a settlement agreement with the departing employee to keep them out of the market for the duration of your fundraise, says Sunaina Sinha, managing partner of Cebile Capital.
“The last thing you want is your employee running around speaking to the exact same LP you’re trying to speak to,” she says. “You might have to pay extra for it, but it’s worth it.”
An investor wants to make a big commitment to your fund, but doesn’t meet transparency guidelines — do you accept them?
This ultimately comes down to the GP’s compliance with its own legal obligations under applicable money-laundering laws. Non-compliance could result in criminal liability, and there’s the potential for issues with future tax transparency reporting, Rife says.
“There are sometimes alternatives available to receiving potentially sensitive information regarding a beneficial owner of an investor. For example, in many jurisdictions a regulated third party can provide a certificate which the sponsor may be able to rely on when performing their own ‘know your client’ checks,” he says.
“The sponsor should seek advice as to its own legal obligations and act in accordance with those, even if it ultimately means declining the investor.”
You’re a first-time fund and you can’t get in front of investors — how do you get some attention?
Hire a placement agent who can open LP relationships for you, says Sinha. First-time fundraises are usually a law-of-large-numbers game where 100 meetings may only amount to one cheque.
Warren Hibbert, co-founder of Asante Capital, suggests focusing at least 50 percent of your time initially on new deals.
“You’ve got to show you’re in the market and have privileged access to transaction flow because it becomes a self-fulfilling prophecy: you’re in the market seeing stuff, you’re ready to go, which justifies you having capital and mitigates the perceived fundraising risk that may put LPs off doing work initially.”
This is clearly a challenge if you don’t have capital, but LPs are often happy to look at co-investment opportunities.
“[It’s] vital, however, that as part of getting the deal done and providing co-invest that the GP secure commitments to the first close.”
Differentiation is key; GPs must recognise their private placement memorandum is one of 60 on an LP’s desk, says Jeff Eaton, a partner at placement agent Eaton Partners.
“You’ve got to be able to differentiate your story and provide a reason for somebody to think they should meet with you, either because your performance is much better than anybody else’s or you’re doing something a little bit different that they don’t have exposure to.”
Recognise, too, that the “real work starts after a meeting”, Eaton says. Anticipate follow-up questions and information requests, prepare the materials ahead of time, and respond promptly – within 48 hours.
“If you come out of a great meeting and it takes you three weeks to respond to their questions, that LP’s moved on.”
LPs don’t seem to understand your innovative strategy — how do you convince them to take a chance?
Consider competitors with a similar strategy to you and get a list of their investors, says Sinha. Funds of funds that can invest opportunistically are also a good bet.
Try to meet with chief investment officers, rather than heads of private equity who can be more constrained.
“In a bucketing scenario you want to get to the senior-most decision-makers who can think more creatively and sensibly about their portfolio allocation,” Sinha says, adding the best way to demonstrate strategy is doing a deal.
“LPs often say to us in these scenarios, ‘show me a co-investment so I can understand what you do and how you do it’.”
If the same questions are coming up time and again, adjust the marketing messaging and material, says Eaton.
“We keep track of every question that’s asked in every meeting, and if we see the same question is showing up more and more, we might change the marketing deck or the pitch to address those questions more head-on and directly.”
Up to a certain point, it’s worth persevering to find those investors that have appetite for your fund.
“Conviction is so important. You should have belief in your strategy and try to find the right money to match that. There are plenty of investors out there that are quite flexible in terms of bucketing,” Turtle says.
“If you eventually do hit a brick wall, see if you can tweak your strategy to fit within the dimensions of the asset class.”
One golden rule: don’t overcomplicate things.
“I don’t care how fandangled the strategy is, an inability to explain the USPs of an offering clearly and succinctly is a significant flaw,” Hibbert says. “If there’s a place for your strategy in the market, it’s more a question of how you explain it, it’s not a question of going out and implying ‘well it’s just so complex, so trust me if you don’t understand.’”
You’ve accidentally violated advertising rules — how do you reassure investors?
If you make a mistake like this, you have to own it, says Sinha.
“You’ll get into more trouble trying to cover your behind than you do just admitting honestly what went wrong,” she says.
“Explain what went wrong, explain the changes you’ve made – whether it’s personnel, systems and processes, you’ve changed it – and tell them what’s going to be different hereafter. Whether it’s this mistake or any other mistake, that’s what investors want to know.”
A potential LP requires you to set up a different structure — what do you need to do, and is it worth it?
You can either set up a parallel fund or a feeder fund, depending on the LP’s requirements.
“A feeder fund is easier and faster to document than a parallel fund and less expensive to administer on an on-going basis,” says Rife. “[It] is also less likely to impact on the terms of the main fund vehicle, and therefore less likely to be relevant to other investors.”
Whether it’s worth it or not comes down to cost-benefit analysis. Unless the investor is willing to absorb the cost of the vehicle’s establishment and administration, it’s typically not efficient for a small LP.
“For a significant investor, the benefits to the fundraising usually justify the burden of running an additional vehicle (and often investors in the main fund will be willing to pool costs of the main fund and the additional vehicle),” Rife says.
Keep in mind that if the demand for a specific vehicle type is tax-driven, there’s a chance demand from other investors for the same type of vehicle will arise during the fundraising, Rife adds.
“Where initial interest for a vehicle is insufficient to justify its formation, investors can often be encouraged to invest through their own structure that addresses the concern or can be put on hold pending further similar demand for the unique vehicle.”
You’re a spin-out and your prior firm launches legal action — how do you reassure investors?
“It’s a competitive market and nobody likes a GP with noise around them, so try to settle it or try to work through it as quickly as you possibly can,” says Sinha.
Hibbert’s first to-do is to cease all marketing.
“You want to limit the damage and resolve it as quickly as possible, while not appearing disingenuous by not disclosing it to your LPs (which the GP may be prohibited from doing),” he says.
“If investors hear of an explained legal dispute it’s typically a ‘pens-down’ moment until the dust has settled. If it can’t be resolved in the immediate term then LPs should be told in person. It will be difficult to continue marketing until the matter is resolved.”
If the litigation is made public, make sure you’ve spoken to all your investors.
“Everyone will be legally advised and restricted as to what they can and can’t say, but make sure you’re saying something,” says Hibbert, “[For example] ‘I can’t speak, but you can insinuate that the situation is X, and we’ll be in touch as we near a resolution.’ Getting out ahead of it and being transparent wins goodwill.”