As general partners, limited partners and their advisors prepare for the expected 2005 fundraising gold rush, it is worth considering the likely challenges facing them, particularly during the pre-marketing phase. Over the last few years, as is widely acknowledged, fundraising has become increasingly institutionalised and process-driven. One consequence of this is that as both LP expectations and GP competition have increased, so has the importance of effective fund marketing. In order to avoid meaningless introductory meetings and conversations going nowhere, a fund must establish as early as possible its credibility as a potential investment recommendation.
Consequently, it is vital that marketing documents – Private Placement Memorandum (PPM), pitchbook, due diligence pack – address LP needs and meet LP expectations. Apart from superficial trends, compelling marketing is generally based on a close understanding of the audience, the product and the market.
The following suggests a few thoughts that might be included in pre-marketing discussions.
KNOW THE AUDIENCE
Dealing with bureaucrats. Some LPs are prepared to take risks in order to outperform their competitors. But a significant portion of the LP universe is composed of more bureaucratic institutions that employ investment professionals who are unlikely to make investment decisions based on gut instinct. It is in every LP's interest to ensure that proposals made to their investment committee are defensible. At some institutions the only shortterm measure of success for the individual(s) in charge of alternative investment is investment committee approval. Hence they have to make clear why the investment committee has been asked to spend time on a new fund.
Moreover, in any bureaucracy, where failure can have at least as many repercussions as success, it is easier to justify with hindsight the decision to play it safe and, in industry parlance, “buy IBM” than to invest in, say, an exciting emerging markets technology fund. Consequently, the main concern of the LP may not be to find new opportunities but to identify funds that clearly fall within pre-defined investment criteria. Any marketing campaign should reflect a clear understanding of these pressures.
Show me the money. A well thought-out marketing campaign should, for example, be built around the fact that most institutions invest in private equity funds primarily for one reason: to make money. Consequently most due diligence processes, from initial cut to final recommendation, revolve around two questions: Has this team made money? And can it do so again?
These questions may seem obvious, but GP marketing material surprisingly often fails to address them properly. Take investment case studies for example. They can efficiently demonstrate not only that a team has made money in the past, but that it did so by following the strategy and exploiting the skills from which the new fund will also benefit.
However, investment case studies are often included almost as an afterthought in the PPM and the pitchbook. This can happen for instance when GPs choose to focus on other characteristics of their partnerships that they consider more interesting such as market position, organisational development, management systems and so on. But unless these aspects relate directly to the two key questions, these GPs are wasting valuable LP attention time. Interesting anecdotes without adequate proof that the fund on offer can deliver will not persuade a sophisticated investor to invest.
Honesty is the best policy. The aim of marketing is to present the best story in the best light. In the past, some GPs have been tempted to go a bit further – to omit unsuccessful investments on the grounds that they are not relevant to the current investment strategy; to start track record calculations from the most favourable date; to claim write-offs as unrealised investments and so on. LPs have become familiar with such tricks – and nothing is more likely to alienate them.
To be fair, don't blame a GP for trying to make the most of their story – or for carefully selecting which facts to emphasise. But in order to keep LPs interested, it is sometimes necessary to prove that all other boxes are checked before revealing less favourable facts. Often a full explanation of such facts can and should wait until the firm is guaranteed sufficient LP attention to make its case properly. In order to retain the goodwill of prospective LPs, a GP should ensure that the PPM – or at least its appendices – contain a full statement of the firm's history and intent.
KNOW THE PRODUCT
Avoiding assertion. The first benefit of thoroughly understanding one's product is the ability to describe it accurately and in detail. By doing so, a GP should be able to avoid the counterproductive technique of unconvincing assertion.
With so many firms in the market, it is becoming ever more important to be differentiated from the herd. When attempting to demonstrate this in one relatively short document, some GPs can be guilty of asserting their value rather than proving it. This can be particularly damaging to credibility as a large number of useful phrases have, unfortunately, proven so apt to so many firms that they have become meaningless.
For example, over the last few years LPs have focused on firms capable of adding value to companies beyond multiple arbitrage or financial engineering. Most GPs are aware of this and have pitched their marketing accordingly. Consequently it is increasingly difficult to distinguish between the PPMs of a wide range of firms claiming “a hands-on approach to value creation”, “proactive” investment strategies, and “a focus on value-add at the portfolio company level”. It is not enough to rely on generalised assertions. At the very least, it is necessary to reach a level of detail where the differences become clearer or to give short real life examples to illustrate each claim.
Defining competitive advantage. As private equity develops, LPs are asked to select from a growing number of firms, teams and funds, and a firm that is able to give accurate guidance on its market position is providing a key service, and earning real credibility in the process.
In order to do so, clearly a GP must explain the market opportunity, and it is reassuring to demonstrate in-depth knowledge of the market at the same time. However, it is less valuable to devote time and space to unfocused market analysis. In doing so, the GP is no longer making the case for its fund alone, but for all funds operating within that market. For a GP with thorough understanding of its product and itself, however, the message can be tailored to focus on the elements of the market that directly relate to its specific strategy, approach and team characteristics. Such analysis lies at the heart of effective competitive differentiation.
KNOW THE MARKET
Benefits of familiarity. Whilst differentiation is important, there are also benefits to blending in with the crowd – or rather, to presenting LPs with something reassuringly familiar. For safe, long-established funds in long-established markets, dynamic, creative marketing materials may be the only means of differentiation. But for any GP that doesn't conform to current safety standards, it is more valuable to emphasise as much conformity with the norm as possible. To demonstrate an acquaintance with standard fund presentation, structure and terms is to suggest experience of private equity protocol. Cloaking challenging content in a familiar form is an important source of reassurance.
Maintaining momentum. In a growing market, with ever-morecomplex fundraising processes, LPs are dealing with many distractions. Retaining LP interest over a 12 to 18 month due diligence process can be difficult therefore, but it is necessary to drive the process to closing. One important step is to ensure complete understanding of exactly what will be required and when. Having the right materials at the right time, meeting deadlines and showing professional attention to detail maintains both credibility and momentum and is an excellent means for GPs not enjoying a spot in the top tier of private equity funds to give the impression of experience and popularity.
Marketing – or investor relations – should continue throughout the life of the fund. As private equity continues to mature, all GPs need to build on existing and potential relationships through regular, open and timely communications and to build in-house understanding of trends, needs and expectations to drive the development of the next fundraising campaign.