The current environment is conducive to raising a first-time fund. The confluence of benign equity markets, low interest rates, strong private equity performance and positive investor sentiment towards debut funds has set the stage for a robust fundraising opportunity. According to a recent industry study, an impressive 51 percent of institutional investors expressed that they “will or have considered investing” in first time funds, up from 39 percent in 2013. However, raising an inaugural fund remains a difficult and resource-intensive exercise; avoiding the following missteps should maximize a new team’s chance of fundraising success.
Failing to obtain an attributed track record
The gold standard remains full, written attribution for all relevant investments from a prior employer showing key deal data. However, many firms are not willing to provide this information, in which case a letter confirming which investments a person played a senior role in is also useful. If the employer is not willing to provide anything in writing, a positive verbal reference will be additive. Failing that, you will need to re-construct your track record using publicly available data and reference calls. Typically, the best time to negotiate for track record attribution is before you leave; you may find that afterwards the level of co-operation declines. If you are also able to secure an investment from your former employer in the new fund it will be a powerful signal.
Not addressing concerns about organizational risk
One of the chief concerns of potential investors will be how the team dynamics will work. If the team has not all worked together previously, consider making several ‘on strategy’ investments as a proof of concept before launching the fund. Further, distribute the economics of the new fund widely amongst the team to create a powerful motivator. Finally, be thoughtful about the operational side of the business; identifying a strong – and presentable to investors – CFO or COO shows concretely that a new firm is properly investing in itself.
Giving up too much to a cornerstone investor
It is tempting to strike a deal with a large investor to achieve a fast first closing. However, be wary of what you give up; other LPs will be highly allergic to any outside influence on the team’s investment process or governance. Providing economic benefits such as reduced carried interest or lower management fees to a cornerstone investor is fairly common and – provided the alignment of interest is not unduly diminished – typically not a deal breaker for other LPs.
Focusing on the wrong investors
Many investors are keen to jump on the first time fund bandwagon in theory, but far fewer actually execute such deals. Identify the types of investors more likely to back a such a fund – for example family offices, endowments and certain fund of funds – and investigate their track record of actually investing in such managers. Also, LPs that have invested with your previous firm can be an excellent starting point.
Failing to differentiate the offering
Every team feels confident they have a compelling story, however many have not properly reviewed their competitors’ offerings; almost every private equity firm claims to have proprietary sourcing and distinctive operating value add! Carefully articulate what sets your strategy apart in your marketing materials.
The best case scenario for a firs time fund is to hit its cap within a few months of launch, with a well-diversified mix of high-quality investors. Keeping the above points in mind will provide the best chance of achieving this goal.
Karl Adam is a director in the London office of Monument Group.