Last week, we reported there are more private equity funds looking for capital than ever before. As of last week, there were 2,199 funds in the market across private equity, venture capital, real estate and infrastructure, according to private equity data provider Preqin. (That number is constantly changing, so it could be higher at this point.)
With this historic level of crowding in the fundraising market, we at peHUB figured it might be helpful to reach out to some experts and find out just how GPs can get themselves noticed: How to stand out from the teeming masses?
There are some obvious answers—have great performance, avoid senior level departures, don’t have a sex scandal.
Firms with the strongest performance are having no problem getting noticed. Let’s leave them aside for now, because they don’t need any help. (I’m looking at you, KPS, H.I.G., ABRY Partners, et al.)
But what about other firms out there, the ones with good, but not great performance? Those that have been solid but not spectacular; the newbies—first timers or spin-outs from larger shops. What can this motley assortment of managers do to pretty themselves up for the dance?
First, sage wisdom from an unnamed LP: My biggest tip, don’t show up at my doorstep for the first time when you are fundraising and expect me to be ready to participate in your first closing 45 days later. Come talk to me years in advance of your next fundraise.
Before you request a meeting or walk in my door, do your homework on my company and my portfolio. Would you walk into a job interview without having done that on a prospective employer?
Once you know a bit about my portfolio and what it needs, pitch your fund if you think it legitimately addresses a need in the portfolio and is better than what we already have.
Importantly: If the PE team says, “no,” don’t do an end-around to our board members, CIO, etc. Also, not a good idea to start there, other than requesting a polite introduction.
Know your target: To go along with the LP’s advice, GPs need to understand who they are targeting, said David Fann, chief executive officer and president of advisory firm TorreyCove Capital Partners.
“Many of those raising capital are first-timers. Now that the asset class is mature, only a few LPs have interest in newbies. Also, large programs tend not to be interested in the very small—so the sellers need to be aware of the potential buyer,” Fann said.
Co-investments: You might get a leg up by offering a co-investment opportunity or a secondary sale during fundraising, said Christian Kallen, a vice president at private markets investment manager Hamilton Lane.
“If you have a larger deal in the pipeline which you are going to put in the fund, you can offer that as a co-investment to prospective investors. Right off the bat, the LP will be able to put quite a bit of money to work in working assets,” Kallen said.
As for secondaries, prospective LPs can be offered stakes in prior funds that existing LPs are looking to unload, Kallen said.
Incentives: Incentives can be a good way to tip the scale in your favor, especially for LPs that are already interested in you.
“Sponsors may be able to get the attention of the investor community by offering certain material LP-favorable terms, such as an outsized GP capital commitment, a reduced management fee based entirely on invested (rather than committed) capital and ‘early bird’ discounts,” says Debevoise & Plimpton partner Jordan Murray. “Also, sponsors who are perceived as being regular providers of no-fee, no-carry co-investment opportunities also may have an easier time finding traction in this frothy fundraising market.”
Don’t take “no” personally: It’s important to roll with the punches, according to Alex Leykikh, partner with placement agency Atlantic-Pacific Capital. “Be able to accept ‘no’ graciously from limited partners,” he said. “You can’t please everyone and not all LPs have the same issues, needs and perspectives.”
Fundraising stamina: Seems like a strange concept to someone on the outside, but to those who have raised funds, this might be one of the toughest parts of the experience. The slog, the road miles. What did Indiana Jones say? “It’s not the years, it’s the mileage…” I’ve talked to enough GPs just after they stumbled off the fundraising trail to understand raising a private equity fund can truly be brutal, especially as the job of finding capital becomes increasingly global.
“GPs need to be able to travel consistently, several days per week, and potentially for many months pitching the offering,” Leykikh said.
Crafting your story: As someone who tells stories for a living, I can attest to the importance of relaying a clear, concise and compelling story. This is especially important for GPs battling it out in a viciously crowded market.
“Differentiation is critical. Many LPs are culling the number of managers they invest with. Those that succeed in fundraising are able to articulate why they are different and how that translates into value creation for the LPs,” Fann said.
Part of this narrative involves track record, and unfortunately for many firms, performance that is just not good enough means little to no new capital. “Most investors are not interested in a third or fourth quartile fund but we see many of those coming back—almost hoping and praying,” Fann said.
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