In a previous article, we looked at a number of considerations relating to the content of a fundraising reference pack. In this companion article, we examine considerations relating to the actual process of having a fundraising reference pack prepared.
Use a third party to prepare the reference pack
It is best if the referencing exercise is carried out by a credible external party with the requisite level of technical knowledge and experience. Further, best practice is for a manager to have no involvement in the actual reference calls at all and, in fact, to never have sight of the finalised write-ups. By having the reference pack prepared by an external party and on an arm's-length basis, you will lend it credibility in investors' eyes. Investors are often highly sceptical of reference packs where calls have been undertaken by the manager itself or even a placement agent. Ensuring that the final report is also hosted by the third party (with no access available to the manager or placement agent) is vital, to retain the integrity of the project, in the eyes of potential investors.
You may be involved in helping to draft some of the questions to be asked during the reference calls, although the process should be led by the third party and your input should be additive, only: it is fine for you to suggest an area of questioning that should be added to the interview, but "please don't ask them this" is not an appropriate comment. If there ARE issues, they will come out, anyway. These conversations should be had in a scoping call with the third party and further discussion of content should not be entered into. In the same call, you may wish to outline any particular nuances of your investments or relationships that can be helpful to the third party. You will need to inform your referees about the process and the third party undertaking the exercise, and you will need to include a note referencing the fact that the third party will not call everyone on the reference list. Best practice is for this communication to be in the form of an email – you should not be calling your referees to coach them on what to say!
You may find the following email template useful for this purpose:
As part of our process to raise our next fund, we have instructed [third party] to conduct some referencing calls and produce a report that will be made available to potential investors in the fund.
We have been asked to provide a list of contacts for [third party] to speak to and we wanted to include your name in this list. [Third party] will only contact a sample of the names we provide.
Although the information you provide will be made available to investors, this will be managed by [third party]. We will never see the information, ourselves.
Please let us know if you would prefer not to be included. If we do not hear from you by [date] we will assume that you are happy to be contacted by [third party] to set up a convenient time to speak. The interview will take around half an hour.
If you have any questions about this process, [contact at third party – include email and phone number] will be able to answer any questions you have.
When you send this email, you should cc: your contact at the third party conducting the research.
How should potential investors gain access to the finished report?
As already noted, best practice is for a manager to never have sight of the finished reference write-ups. To that end, the third party should be providing prospective investors with access to the reference pack, ideally via a privately hosted portal. The document should never be hosted in your own data room.
Make the reference pack 'on-request'
It is preferable to make access to the reference pack an 'on-request item' and to provide it only to prospective investors that have completed or substantially completed their commercial due diligence. By doing so, you can have some confidence they are already 'on the hook' for a commitment and – hopefully – the reference pack will be confirmatory of an already-formed positive view.
Investors will still undertake their own calls
There is anecdotal evidence to support the view that providing a written reference pack reduces the number of reference calls prospective investors take. A written reference pack will also allow prospective investors to focus their own calls. Both are good for your referees, as the burden on them will be lessened. However, prospective investors will most likely still undertake their own reference calls, if only to satisfy their own internal due diligence processes. Consultants, in particular, often have agreements in their advisory contracts with clients that specify a certain number of reference calls on behalf of the client will be carried out during any due diligence. The written reference pack will therefore need to be supported by the opportunity for prospective investors to undertake their own calls and it will be necessary to provide a reference list. As with the reference pack itself, it is preferable to make the reference list an on-request item and for calls to be undertaken by prospective investors once they have substantially completed their due diligence.
The process will take time
The exact time will depend on the number of reference calls being made and the time it takes for calls to be locked in. Six to twelve weeks is the typical amount of time required. With that in mind, it makes sense to begin this process early in the fundraising project.
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.