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Editor’s Letter: The boring (but vital) part of raising a first-time fund

I can’t tell you how many times I’ve heard that one of the vital aspects limited partners want to see out of a debut firm is that the new manager is building a business, not just collecting money to go invest.

Creating a robust back office capable of handling legal, accounting and compliance issues is a key issue for some investors.

That is just one of the challenges faced by new managers. In Buyouts’ annual issue about first-time funds, you will read a lot about challenges — and how they were overcome. Another big theme: sacrifice.

Just making decision to strike out on one’s own is a hard one to make. In most cases it means walking away from a stable position and salary to embark on something that ultimately may not work out.

Making a first fund a reality may also require a person to make sacrifices in his or her personal life — like selling a fishing boat. Just ask John Stewart, a partner at emerging manager MiddleGround Capital. His story gives readers a personal sense of what it takes to start a new venture and highlights the passion required if a new manager wants to be successful.

Besides passion, new managers must be prepared to dig deep into their own pockets to build the infrastructure for their new firm. That’s where some LPs are scrutinizing emerging firms. How committed are the partners to the venture? How much of their own money are they putting on the line? Are they building a business that’s meant to last? 

LPs definitely have an appetite for finding the next great opportunity, but they are very selective when it comes to backing new managers. We see this in the fundraising numbers for first-time funds, which have fallen since last year.

To get the ear of an LP, it helps for a first-time fund manager to have an angle, which generally means a sector specialty or perhaps an anchor relationship. But it also includes evidence that demonstrates his or her ability to build and run a business. LPs want to see that back office evolving along with the firm and it’s an aspect of building a firm new managers can’t ignore, even if it’s not the most glamorous part.