By Nicholas Donato, Navatar
The path to institutional capital can seem murky at best. With few clear guidelines – and few straightforward success stories – a number of common misconceptions about the fundraising process persist in the market. These notions were revealed in a recent survey designed to challenge GPs’ conventional IR wisdom.
The 250+ fund managers we surveyed worldwide (with KAP Group, an IR consultancy) came predominantly from the middle and lower-middle market. And while fundraising is never a one-size-fits-all exercise, and different circumstances call for different strategies, GPs in a few instances should question prevalent practices that IR experts say may undermine their chances of success.
Here are our key findings from the survey:
Q1: What’s the rule of thumb for the number of meetings you should schedule for every $100 million you hope to raise?
Nine out of 10 GPs saw some sort of formula – that it takes 50, 100 or “as many meetings as possible” to hit their target. The fallacy stems from the stubborn belief that “the more meetings you have, the greater your chances of securing an investment,” as KAP Group’s Erin Roeder puts it.
The better strategy is to focus on quality, not quantity, and prioritize meetings with the highest probability of success. By this approach, managers start with their top 15 or so LP relationships, negotiate key terms, and use those initial commitments as fundraising momentum.
It may sound simple, but not enough GPs have the tools, such as Navatar, to reliably monitor their touchpoints with investors (static Excel sheets no longer cut it) and leverage data analytics to identify their warmest relationships.
The savvier GPs know that LPs who are actively engaged with your emails, events and webinars should be ranked higher than those who do not.
Q2: What’s the best use of the pitchbook?
About three out of four managers surveyed did not necessarily intend to use their pitchbooks to guide their LP meetings. Many respondents wondered whether pitchbooks were best left untouched to facilitate more organic conversations between investor and fund manager.
But according to KAP Group, using pitchbooks to guide your meeting can ensure you address key points, and failing to open your book risks skipping crucial themes like who you are and where you fit within the marketplace.
While a high degree of flexibility should be retained to ensure you’re addressing the LP’s needs, using the pitchbook as a basis for your conversation should be the default approach.
Q3: When should you expect an LP to re-up?
On this topic, we wanted to address the misconception that institutional money is always sticky. While many managers assume a high re-up percentage for their next funds, LP loyalty is truly evident only when managers stick with their proposed strategies, hit their return targets and manage their LP communications well.
A majority of our respondents got this right, understanding that a re-up is less about “has anything gone terribly awry” and “are key investment professionals in place” and more about promises that demonstrated you fulfilled your fiduciary responsibilities, adhered to the LPA’s investment strategy and exited deals in a timely fashion.
Q4: Should you offer fee breaks early in the fundraising cycle?
Some two out of three managers we surveyed said it would be valuable to discuss or negotiate fee discounts early in the diligence process.
The truth is “fees don’t make or break an investor’s decision to commit,” says Roeder.
Since you don’t want to give away something for nothing, KAP suggests offering fee breaks strategically to give an investor incentive to come into a first close or to encourage larger commitments. The trick is to begin these negotiations once you’re sure the LP is serious about committing.
Q5: When should key persons attend LP meetings?
The majority of our respondents understood the importance of having investment principals travel to meetings with prospects.
While IR professionals play an important role during such meetings, including developing an ongoing rapport with investors and tracking questions, LPs expect to get to know the persons responsible for sourcing deals and generating returns.
If you’d like to learn more about the survey, and the “dating mistakes” made by GPs, I encourage you to check out our recent webinar “Five Fallacies of Fundraising” at https://www.navatargroup.com/webinar/five-fallacies-of-fundraising.
Nicholas Donato is an industry strategist at Navatar, the premier cloud platform provider for alternative assets and investment banking. He is a former editor at Private Equity International. He can be reached at [email protected]. Photo courtesy lovelyday12/iStock/Getty Images.