I am writing this in the busy lobby of Amsterdam's Okura Hotel, the home of SuperInvestor, one of the private equity industry's most important events. I'm surrounded by fund managers, flanked by placement agents, who are hunting down investors. In order to get enough of these investors to commit to a fund, the manager will need to create momentum and will, likewise, need to make sure that anything that could cause friction, en route, is closely monitored.
Ultimately, the success of any fundraising is down to the interplay between these two things: momentum and friction. Generate enough momentum and even the most stubborn obstacle can be knocked aside; suffer from too much friction in your process and you'll never pick up enough speed to get over the finishing line.
In this and the next Loud and Clear, we'll look at each, in turn.
Let's begin with momentum. Efficient fundraising relies on convincing prospective LPs that they must act now. This can be as much a matter of perception, as reality, of course.
Chiefly, the main drivers of momentum are:
- Scarcity: the perception that the demand for a fund will lead to it being oversubscribed, making desired allocations difficult to secure
- Velocity: the perception that the pace of the fundraising project means that it may be over before the investor is able to commit
Naturally, these are interlinked and act upon each other. As scarcity begets increased urgency, so velocity begets a heightened fear of missing out.
So, what are the strongest signals for scarcity and velocity, for a prospective LP? Let's take a look at five of the most important ones...
Fund target and hard cap
Setting a realistic target and the appropriate "hard cap" for your fund requires thought. Funds will usually want to raise as much as LPs will commit, without this being more than the investment strategy can support. Demonstrating a strong pipeline is, therefore, key. Of course, the gap between target and hard cap sends its own message to the market. Ideally, they will be quite close; otherwise, your fundraising may appear to be speculative – which can be a killer. Make sure that you are speaking to your prospective LPs wellbefore you launch the fund, to ascertain interest levels and therefore set appropriate targets. For a manager whose fund was oversubscribed previously, you might want to target the sum that LPs wanted to subscribe and set the hard cap to around 30% above that – but the more you are speaking to your LPs, the better you will be able to judge this. If you have suffered impaired performance since that last fundraise, you will need to rethink this, of course.
Setting the timetable
Setting out a clear timetable and clearly and consistently communicating this to LPs is an important factor. You should do this as soon as possible, to allow potential investors to ringfence the time required to evaluate the fund. But if you set a timetable, you must stick to it – otherwise, it does more harm than good, suggesting that you either can't generate enough interest to stay on track or that you can be pushed around by LPs that don't want to play by your rules.
The first measurement point for a prospective investor is between the point that a fund is officially "launched" and the point of the first close. Think of it in the same way that performance cars tout the speed at which they can go from 0-60. The time taken to reach first close is a strong indicator of velocity and the percentage of targeted capital raised in that first close speaks to scarcity. In reality, a fund manager may not feel that they have much control over the first close, but it is sensible to assess where the fundraising will need more support. If, six months after launch, a fund has circled €350m of a €900m fund, is it worth waiting three months to conduct a first close, on the basis of expressed interest for a further €150m? Or is it better to close now and press on to the next closing? It depends, and making the wrong decision will have consequences.
An interim close can act as another measuring point but it must be clear to the market that there is a good reason for holding the close. Too many interim closes can create uncertainty, but they are nevertheless a way to communicate the interest in your fund.
"Buzz" – is the market talking about you?
Often underestimated, this can make a real difference, particularly for less well-known managers. Getting some attention in the press, whether organic or self-generated (ideally, both) can draw significant attention back to a fundraising process that might otherwise fall off the radar. Organic "good news" (portfolio activity, exits, recruitment, promotions, awards) can indicate the quality of your offering and help generate fears of scarcity among potential LPs. This can be supported by tailored communications into the market, based on smart research and insightful whitepapers, which can be prepared in advance and released according to a strategic timetable. Another way to demonstrate the interest levels in the fund is to anchor your meeting requests around other meetings you have already confirmed. Indicating that meeting on a particular day is helpful, owing to an appointment with another well-respected LP, close by, can often do wonders.
So, those are some of the key ways to build momentum, but that's only half the story. Next time we'll look at friction in fundraising and how to reduce it.