LP-Friendly Terms Helping Prophet Get Fund Raised – Is It Any Wonder?

This morning’s LBO Wire led with fundraising news of Prophet Equity, a Dallas-based turnaround firm in the market with its debut fund. According to the story, Prophet has $200 million in commitments toward its $250 million goal, which is a pretty impressive feat in this market.

(I believe a random LP recently said, “It’s so bad out there, if you so much as get to a first close, you should throw a parade.) You may remember Prophet from our Dallas Fundraising Showdown article in October. We suggested that Prophet may have a fighting chance of getting its fund raised, despite market trauma, because it was doing everything right by LPs. The firm has a hefty GP contribution to the fund of 25%, or $50 million, and it distributes carried interest to every person on its team. LPs like a strong alignment of interest. Furthermore, the firm has an absolute hard cap to the size of current and future funds. LPs don’t usually take too kindly to massive fund size increases, which can mess with an investors allocation percentages.

The moves are counter to fundraising tactics of Prophet’s founder’s prior firm, Insight Equity. Also based in Dallas, Insight Equity is in the market with a fund, too. That vehicle bumped the firm’s carried interest to 30% on deals with returns greater than 4.5x and doubled its fund size. I haven’t heard any updates on that process since October, but with so many firms lowering their fund sizes and carried interest (for example on the latter, TA Associates), I have to wonder if Insight will pull back on its ambitious terms. At this point it’s not an admission of failure, it’s a matter of practicality.