This is the second in a series examining obstacles and pitfalls of raising a private equity fund. Please email me suggestions for future posts.
Remember that famous line from Wall Street, right before Bud Fox first meets Gordon Gekko?: “Life comes down to a few big moments, and this is one of them?” So far this year, PE fundraising hasn’t been quite so high-stakes an endeavor. Together, buyout and mezzanine firms in the U.S. have amassed only a couple billion dollars less than they did at this point last year (which was a record). But the consensus is that it won’t keep on like that for long. LPs, you’d think, will start weeding out more and more firms. Below are some of the tips I’ve gleaned in the past few weeks on that front. Make sure your firm isn’t among those whose fundraising pitches don’t make the cut.
I’ll start with issues of style, and here’s the big one: Industry pros recommend getting in and out of investor meetings quickly. The human tendency to doze off after two hours in a stuffy boardroom is not to be dismissed. Meet that requirement first, then worry about the rest.
Other PE veterans say that it’s best to conduct the session as an interactive feature rather than a sermon, with roughly half the allotted time reserved for Q&A. The presentation’s handouts should be constructed to encourage note-taking, with appendices for the nitty-gritty financial details, which can get boring if they’re featured in a slide show.
Placement agents recommend having as much of a firm’s key personnel as possible present at the first meeting with an investor. It should start with introductions, so the LPs can attach names to faces. And once the presentation starts, its content should be divided up among everyone, or else the whole affair resembles a classroom lecture, a PE pro told me.
Next come issues of substance, and again my first tip is probably the most important: Ask questions. “I’m always astounded by the number of [GPs] that come in and ask us literally nothing about our business and what we do and what we look for. I think it’s important to show interest, because it’s a partnership at the end of the day,” said Brian Gallagher of Twin Bridge Capital at a recent industry conference in New York. It’s hard to underestimate the warm, fuzzy feeling LPs get when their partnerships are based on more than writing checks.
Also, trying to hide investment black eyes is probably a losing proposition, pros on both sides of the meeting say. “Oftentimes firms come in and they’re not forthcoming on the track record. You’ll have a huge focus and emphasis on the realized portion without talking about the entire portfolio,” said Thomas Henley of Aldus Equity Partners. “Whenever we see people trying to hide the ball and not be forthcoming it’s a complete turnoff.” It’s easy to underestimate how informed LPs can be before the meeting, or how easy it is, in the age of Google and Lexis Nexis, to get informed afterwards.
And in the “duh” category, some GPs make the mistake of pitching a particular market segment rather than getting sector-specific. Praising the lower-middle-market is a narrative that LPs have heard a hundred times before. The 101st probably isn’t going to stick out.
My next post in this series will look at the pros and cons of hiring a placement agent today.