Fund Raising for the Rest of Us

I lived in the Northeast for many years and watched the congestion grow. In the 1960’s and 1970’s what was originally called the Connecticut Turnpike, now I-95, was somewhat quaint and very manageable. On any given day the trip from New York to Mystic, CT was a known commodity with a consistent travel time. You could reliably count on the time to traverse the 130 or so miles. No longer. The road, in fact the entire Northeast corridor from Washington, DC to Boston, is a disaster of bumper-to-bumper frustration seeking a clear lane. Now, one hunts through Waze or Google Maps to determine the swiftest route with the least traffic. The time from point A to point B is now reliably 50% greater than it was in 1960.

In the late 1970’s a group known as Kohlberg, Kravis & Roberts traveled a country road known as leveraged buyouts. It was largely deserted and there were very few places to stop for refueling. They were evangelizing the sector and winning new converts along the way many of whom decided to move to that country road. It then became a two-lane highway that has since accommodated many more private equity vehicles.

In the 1980’s, the private equity and venture capital fundraising business was expanding exponentially. Firms such as Merrill Lynch, Donaldson Lufkin Jenrette and Kidder Peabody were creating formal groups to focus on this “new” product. Like most things generated out of Wall Street, these groups began to build a transaction pipeline to feed a widening interest in private equity investing. With insurance companies, banks and pension funds snapping up these “deals”, it felt a bit like the Wild West and a target rich environment. One could reliably assume that the fund would get raised in a reasonable amount of time because the market demand was expanding very rapidly. With a pipeline of half a dozen deals or more, each banker could be almost certain to walk away from each meeting or phone call with an order. Investors were building their portfolios from scratch and the sky was (seemingly) the limit.

Fast forward to today. Since, perhaps, 2010, how many fund managers have heard from a potential limited partner….”well, I am pretty fully allocated and to invest in you, I must decide which of my managers I will no longer back”? Portfolio managers and investment directors are simultaneously attempting to reduce the number of managers and enhance returns. This requires a careful balance of analysis, particularly given that such decisions in this space can take a decade to prove out.  If there is no twenty-year track record, what can the manager look to for comparison? For all but the most mature, best performing, most well-known managers……..

Marketing a new fund is hard.

The road is crowded and the General Partner (GP) needs to find a clear lane - they are no longer selling a deal, they are developing a relationship. Take a deep breath and settle in. Selling a fund, which was once a transaction, is now a complex marketing exercise to develop a lasting relationship – it is a campaign rivaling that of a military exercise. Investment bankers pitch corporate deals or transactions whose principal attributes are measured in market metrics – comps, discounted cash flows, margin improvement, etc. But raising a fund is trickier. You may find the one investor who is looking for your, oh, so very unique brand of investing. More likely, you will find you are competing for a terribly limited space in competition with a near endless list of other managers. The first requirement will be……..

To develop a relationship.

Relationships are also hard. They require that one listens. Most General Partners are really good at transmit and not so good at receive. The natural tendency is to immediately relate to the potential investor all those things in your head that are trying to burst forth. Honk your horn and pull into that narrow space in the next lane, so you can get to the next meeting. The GP wants the investor to know all about the unique network for deal flow, how amazing the fund is at vetting deals and how many great corporate and private equity relationships there are for exit opportunities. All of this is meaningless unless you know some fundamental facts about the investor. The list of areas to probe can be quite long if you want to get a real picture, but at the very least there are some basics that must be understood.

Does the investor invest in my asset class, sector and geography?

Does the investor have a program to invest in “emerging managers”?

Is the investor’s typical commitment amount compatible with my raise?

What is their process – is due diligence conducted in-house or is there a consultant?

I suspect these all seem pretty basic. These are mandatory gating questions that are certainly required, but not nearly sufficient to win in today’s market. Learning about what makes the investor tick is equally important. Getting behind the decision-making is extremely useful. The investment manager came from somewhere and has a whole host of experiences (good and bad) to draw upon that help shape his or her investment opinions and methodology. Perhaps they were an early investor in a sector that did not do well and they carry that with them as a way to calibrate the potential in new investments. GPs should ask about the past.

Where was the investor before this post?

Have they traveled or invested abroad?

What investment was their most interesting or favorite?

These sort of personal anecdotes, among others, can help the GP to understand what aspects of their own platform or historical deal transacting might be useful to emphasize or draw out. On a more direct note, the GP should also seek to learn as much as possible about other funds to which this investor has committed. This information alone may help to craft the pitch, but it is also useful to ask what it is about certain funds that the investor finds attractive. Why did they invest in that fund?

The objective of all this is to find the nexus for a commitment. It is not good enough just to have a coherent story. There must be some reason that the investor may be pre-disposed to commit. Is there a fondness for the geography over others, the end markets into which your portfolio companies sell, the way you source deals? Some of this can be gleaned by what you hear, but also by what you may research in advance as well, bringing that notion with you to the meeting.

With all this information in hand, the GP can begin to ascertain how to conduct their campaign. However, not so fast……..

Investors have a process. 

Perhaps the single most important thing a GP can do is to inform a potential investor of when they are planning to raise their next fund. With all of the competition for the available capital, most well regarded GPs are quick to tell their existing limited partners when they will next come to market. In this fashion, they put their fund “in the queue”. It also serves as a blocking function. Remember the “pretty fully allocated..” comment? It goes hand in glove with “we have so many re-ups, I have no time for new commitments”. Emerging Managers must find a way to break into this queue and one of the only ways is to begin a dialogue well in advance of your actual fund raising. Limited partners are often quoted as stating that the best time to get to know a new GP is when they are not raising money. This is code for “this is going to take a really long time”. If you are not in a position to disclose ahead of time, then just be certain you are establishing the dialogue as early as possible in your process, since it will take time.

Navigating this crowded highway requires all the tools at your disposal to cut through the traffic effectively and efficiently. Raising a fund for emerging managers and even those who may be established, but are expanding their outreach, is time consuming and requires a tremendous amount of preparation. Most importantly, it is not a transaction; it is a relationship that results in a commitment. Investors are committing for ten years or more with few options for exit and are rightly focused on track record, talent, integrity and motivation. This is the stuff of a lasting relationship and will serve the GP in the long run if they take the time to develop it correctly and nurture it during the life of the fund.