Referencing is an important part of an LP's due diligence process, and all investment managers looking to raise a fund – whether it is their first or fifth – are well-advised to consider having a third-party reference pack prepared.
Quite apart from the time saving for potential LPs (which allows for quicker decision making and less time fundraising), a reference pack is a great way to bring your track record to life – and the value of this is immeasurable.
But what should the would-be fundraiser keep in mind when looking to have a reference pack prepared?
In this article, we look at content-related considerations to do with fundraising reference packs. A forthcoming piece will examine the process involved in having a reference pack prepared.
Who and what should be included in the reference pack?
Portfolio company management are key. Typically it is senior, C-suite level individuals that should be called for a reference, most commonly the CEO and/or Chairman as well as the CFO. Unless you are preparing a portfolio company only reference pack, you should incorporate other counterparties. These will include key intermediaries: in particular, sell-side advisers, but also banking relationships (where relevant), due diligence service providers, and legal advisers, potentially.
Should you include existing LPs?
This is open to debate and will depend on a number of factors, including the strength of the relationship(s). On balance, the answer is yes, where possible, but not too many. Clearly, a strong reference from a bellwether LP can go a long way to giving prospective new investors comfort, but these are the calls any prospective LP is most likely to want to do themselves. Consider including a small number of LPs in the pack.
What deals from your portfolio should you include?
This depends on your circumstances and the extent of your track record. If you are raising your second fund, the answer is easy – the pack should include all your transactions to date. For an established manager, it is more nuanced. A good rule of thumb is to include all deals from your last two active funds. The aim, in any case, is to be fully representative of the range of transactions you undertake. So, for example, managers with multiple offices should ensure there is a transaction from each office included. Similarly, managers that tout sector specialism should ensure there are transactions included from each sector targeted. And, to the extent possible, be sure there is a deal included for each Partner or other senior member of the team. Whilst a referencing project will necessarily be "backwards-looking", on the basis that it is determined by your track record, it is important that the types of investments you seek to undertake in the next fund are well represented.
What about less successful investments?
Whilst the temptation might be to leave them out, you must resist doing so. Every manager has some investments that have not performed to expectations. Take ownership of them. Remember, prospective LPs will not automatically condemn a manager that has made mistakes in the past. But they will be (rightly) sceptical of a reference pack that is only positive and glowing in its praise. And you don't want the first of a prospective LP's own reference calls to be to the CEO of that deal that went belly up, if that deal is not in the reference pack. That will only result in the LP getting a very different view on your capabilities, potentially harming or even undoing the work done by the reference pack and other fundraising materials in positioning you in a certain fashion.
Remember to include a methodology and a disclaimer in the finished reference pack
You should include a notice at the front of the reference pack to explain both the methodology employed in its creation and to disclaim responsibility for accuracy and reasonableness. Your legal adviser should review this. Click here for an example.
In this part two of this article, we examine considerations relating to the actual process of having a fundraising reference pack prepared.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.