Cohere Capital: The covid fundraising challenge

Nearly all our survey respondents say they expect covid-19 to make fundraising more difficult. How can new managers overcome added hurdles?

Raising capital as an emerging manager always requires focus, differentiation and an ability to generate returns, but in a turbulent or uncertain market those attributes become increasingly critical. Managers should spend more time preparing for fundraising and refining their approach as to how they can create value for LPs.

A clear and concise investment philosophy and value proposition can take time to hone, in order to be communicated effectively, but right now that practice and preparation are critical.

In addition, a manager should invest time into proving the thesis can be successful by working to source deals and, if possible, even execute transactions.

Nearly 70 percent of manager respondents say they expect to delay a fundraising launch, but four out of five LPs say market shocks are not lowering their emerging manager appetite. Are plans to delay unwarranted?

There are a few factors that can play to an emerging manager’s advantage.

Primarily, others delaying their launches can present a window of opportunity to be one of the few emerging managers in the market. Additionally, given that fundraising processes can take a significant amount of time, there is limited value to delay as the process will likely outlast the current market uncertainty.

Lastly, the feedback received at the beginning of a fundraising process can help make a manager better at communicating its message later in the process, once the environment improves.

LPs are asking for more frequent reporting in light of covid-19. How can new managers address these requests without becoming overwhelmed?

New managers have the benefit of a clean sheet of paper in many respects when it comes to portfolio company tracking and reporting, as well as LP communications more generally.

As such, when setting up their teams and processes, new managers should be cognizant of these desires for more reporting by LPs and can incorporate them into their initial workflow with portfolio companies as each investment is made. This, in many cases, is actually easier than ‘retrofitting’ reporting into existing processes.

Nine out of 10 managers surveyed expect to increase dealflow to take advantage of lower asset valuations. How can new firms balance the desire to deal with covid-related diligence challenges?

Emerging managers should be wary of a seemingly attractive deal environment, particularly if it makes them stray past their core expertise.

Although covid-19 has created challenges around diligence – by preventing in-person meetings and such – if a manager is investing into sectors or situations that are known to it, many of those concerns can be mitigated.

Pre-existing market or sector knowledge allows for easier diligence and less uncertainty that needs to be underwritten.

Also, as each day passes, the entire M&A ecosystem – bankers, lawyers, accountants – is becoming increasingly adept at virtual dealmaking and finding ways to do ‘business as usual.’

In the end, most diligence, and particularly all the critical diligence, can actually be performed in a reliable manner, even today.