In an era of ever-increasing fund sizes, increasing your fund size may not be right for every GP.
Sunaina Sinha, managing partner of placement and advisory firm Cebile Capital, discusses five things a GP needs to know when planning to raise a larger fund.
If a GP is thinking about raising a larger fund size, we say you have to show a few different things. Firstly, how are you going to find these bigger deals, show some bigger deals that you use co-investment dollars to do in your existing fund. You have co-investment demand from existing LPs, show that you can write a larger equity cheque size in this current fund by doing a larger deal or two using co-investments.
Number two: how are you going to deploy a larger fund size? Will you hire more partners, will you increase your deal team? Show that you’ve got the team to deploy the dollars.
Number three: are you adding adjacent strategies or are you adding adjacent geographies? For example, if you are a TMT and financial services fund, are you now going to add healthcare or some other strategy to your funds mandate therefore you can now add another bucket of capital to your main fund to do deals on that new sector. Justify on what basis you are going to add extra dollars to the pool.
The fourth thing we always say is show the pipeline. Investors are going to want to diligence where are these deals going are to come from. Are you now suddenly going to change the mix of deals whereas you could’ve done some proprietary deals in the older fund size? Are you now going to do more auctions and therefore pay higher prices? Show how you are going how to de-risk the pipeline for investors.
And our fifth and final piece of advice is absolutely to try and focus the fund on one holistic strategy. Don’t now try to add and bolt on strategies just to show a larger fund size, a larger mandate because that will only dilute your returns. And if you dilute your returns you may not have a fund franchise to raise and raise larger funds on vintage after vintage.