Editor’s Letter: Going fundless to raise a fund

It’s interesting to go back to my reporting on new-firm formation and find out who managed to reach final close on their first-time fundraising — and who is still out there raising.

A crop of strong shops formed over the past year have blown through their fundraising and finished the marathon — a feat that seems like the impossible dream for so many GPs.

Nonantum Capital Partners is a good example, and not one shared by the majority of GPs. The firm launched at the beginning of the year and closed its debut fund on $385 million in April. That seems remarkable, but Nonantum had a couple things going for it:

Nonantum’s founder, Jon Biotti, is a well-known executive from a highly respected firm, Charlesbank. LPs knew him and his work, on top of which, Charlesbank supported Biotti’s spinout.

That is a rare occurrence, when a former firm gives material support to the departing executive. But in this case, it obviously served to help Nonantum push through its first-time fundraising.

Most first-time fundraisers don’t have this kind of experience when they hit the market. And from talking to folks for this issue of Buyouts, which is dedicated to emerging managers, I heard some tips on ways to get through that first fundraising slog.

The most common piece of advice I heard was to start out deal by deal — find a backer or a group of backers, source capital for each individual deal, enabling those first investors to get a piece through co-investments, and build a track record. (See our cover story on Shore Capital.)

This seems to be the most well-trod path for first-timers that have grown beyond emerging manager status into Funds III, IV and beyond. 

It’s not an easy go, of course. Scrambling for capital each time you find a deal, and having to nail down that financing from a scattered group of investors, doesn’t sound fun. And apparently isn’t fun.

But it’s a necessary proving ground. And it enables LPs to get a sample of a new manager’s skills on individual deals before they choose to lock their money up for years.

This also gives the partners time to work together, gives them a chance to interact under pressure. Those who come out whole on the other side have a lot of things going for them, especially when those pre-fund deals perform well.

A handful of executives are so well-regarded that they can leave their former shops and raise $700 million or $1 billion their first time out.

But they are the exception and for those mere mortals who have to scrape by, going the fundless route seems the best bet to building a lasting franchise.