Among the most useful (and comical) pieces of fundraising advice from a recent webinar series produced by our publisher, Thomson Reuters, came from Paul Denning, CEO of placement agent Denning & Co. LLC in San Francisco. He said he tries to avoid using the phrase. “As someone pointed out to me one time,” said Denning, “you wouldn’t hire an emerging doctor, or an emerging airline pilot.”
Denning also suggested keeping in mind a line from the movie “Pulp Fiction,” which he reproduced as: “During a conversation, are you the kind of person who listens or who waits to talk?” Said Denning: “During your pitches you want to be the person who’s listening. If you aren’t getting that person sitting across the table asking questions, then you’re not communicating.”
Thanks to sponsorship from Merrill DataSite, Thomson Reuters altogether put on five webinars designed to help new managers reach their fundraising goals. The programs covered everything from the preparation of marketing materials to how to raise an SBIC fund to trends in partnership terms and conditions. One of the more lively was the one in which Denning was a featured speaker—a one hour program on August 7 on how to identify potential investors. Below I’ve summarized some of the best advice to come out of that program.
Be prepared for it to take a long time. Denning said he advises clients to expect to spend at least two years raising money, between planning and preparing marketing materials and going out on the road show. “I suggest you take recent pictures of your family and put them in your wallet, because you’re not going to see them for a while.”
Pick your spots carefully. Denning presented statistics from Preqin showing that just 14 percent of investors say they invest in first-time funds, while another 4 percent will consider it. Those most likely to have done so include funds of funds (21 percent invest in them), public pension funds (11 percent) and endowments (9 percent). Among those less likely to have done so are banks (5 percent), insurance companies (5 percent) and family offices (4 percent).
Don’t underestimate the importance of the first meeting. Irwin C. Loud III, CIO and managing director of Muller and Monroe, an adviser that specializes in backing next-generation managers, presented a long list of do’s and don’ts. Among the do’s: be prepared to tell your story in 20 minutes with passion and energy, ask about the LP’s program so you can tailor your comments accordingly, and demonstrate teamwork in answering questions. Among the don’ts: giving a long presentation that covers too much ground (you don’t necessarily need slides at this point in the process), bringing more than three or four people to the meeting, and being evasive on questions, especially those having to do with mistakes or shortcomings.
Take the long view. Said Carter F. Bales, chairman and managing partner, NewWorld Capital Group, which has been out raising a first-time fund with a focus on environmental opportunities: “It’s essential to set long term goals. Your’e really out building a franchise, not just for this fund, but for three funds into the future. You’ve got to be very patient. A lot of folks are going to like you but not invest with you early on. But it’s still the beginning of a relationship, and in that sense there should be no such thing as a bad meeting.” Among the things NewWorld Capital does to build relationships are sharing with investors white papers are articles on environmental topics; hosting regular webinars; offering co-investment opportunities; and connecting LPs with one another.
Remember the data is on your side. Bales of NewWorld Capital rolled out statistics showing that, in general, newer funds outperform older funds, small funds outperform big funds, and sector funds outperform generalist funds. “There’s a strong reason why LPs should be open to new DNA and you represent new DNA if you’re early on in your development as a GP,” said Bales. “So I don’t think you should go into the meeting all insecure and worried that you’re an early fund.”
Know what agents can do for you. John Crocker, then managing director, Deutsche Bank, observed that placement agents aren’t necessarily helpful landing a cornerstone investor—a big name that can draw other investors in and give you crucial momentum. But if you can do that on your own, then it becomes that much easier to attract placement agents, who naturally want to take on clients with solid fundraising prospects. You can also get “far better pricing” from agents, said Crocker, who has since left his position at Deutsche Bank. One of the most overlooked benefits to using a placement agent is to gather feedback from investors. Professionals whose full-time job is marketing can read the body language and reactions of investors in meetings; and they can solicit feedback from investors who otherwise might not feel comfortable giving feedback to you.
Be willing to rethink 2 and 20. Investors worry about management fees becoming profit centers for firms, and next-generation managers should go the extra mile to show how their operating budget and expected fee income match up, said placement agent Denning. Investors are also experimenting with alternatives to the traditional 20 percent carried interest, and may be amenable to a carried interest that scales up to 20 percent based on performance.
Interested in listening to recordings of the five webinars in our series for next-generation managers? Just shoot me an e-mail at firstname.lastname@example.org.