Ready to get your first fund raised? Better make sure not to give up too much of the economics to an anchor investor.
That early, anchor investor can play a key role in your fundraise by convincing other investors that your fund is viable. But give up too much carried interest and investors will wonder if there’s enough left to reward the investment team.
“You don’t want to be seen as a captive fund,” advised Anna Dayn, founder and CEO of Dayn Advisors LLC, an adviser to family offices and other limited partners.
That was just one of several tips provided this spring during the webinar PE/VC Roadshow Bootcamp: Getting Your Pitch Ready for Prime Time, hosted by Buyouts Insider, publisher of Buyouts.
The four speakers — alongside Dayn were Kelly DePonte, managing director at placement agency Probitas Partners; Irwin C. Loud III, managing director and chief investment officer at Muller & Monroe Asset Management; and Tom Angell, partner at WithumSmith+Brown — gave their best advice to aspiring fund managers looking to stand out in a crowded market.
Below are highlights:
- Don’t battle-test your story with potential LPs. Sure, if you happen to have a good friend who is an LP, go ahead and see what they think, advised Probitas Partners’ DePonte. But you need to have a coherent presentation ready before you talk broadly to LPs and consultants. “If you really end up changing your story or how you’re telling your story along the way, it can be confusing. You can burn a magic bullet by going out to someone too early,” said DePonte. “You only have one chance to make a first impression.”
- Make sure your attribution is in good order. Private equity is an apprentice business and you and your partners are likely to have built a track record at another firm. “Before you depart, come to an agreement with your previous firm on receiving a signed attribution letter outlining your roles on specific transactions and the returns on those investments on the point of your departure,” said DePonte. “That’s the Holy Grail.” At the very least you’ll want to provide a list of references from CEOs and CFOs that you worked with on previous deals.
- Try to learn the particular due-diligence process of each LP. Muller & Monroe, for example, emphasizes four key elements in due diligence: people, strategy, execution and alignment of interests, said Loud. But every LP is different, with their own timetables and philosophies. “Some limited partners will want more detail about your track record than others,” said Loud. “Others are hyperfocused on the legal platform while others don’t seem to care. Some have flexible timing while others have regimented approval processes and allocation timetables. Some like to lead. Some will only go last.”
- Bear in mind that the first meeting is all about portfolio fit. The LP is in the screening phase, trying to determine whether your fund fills a hole in the portfolio. You may have a fantastic investment strategy, team and track record. But if your fund is not a good fit, you aren’t going to make the cut; the meeting becomes more about setting the table for future funds. Assuming you are a good fit, “you should be prepared to tell your story in 20 minutes, soup to nuts, uninterrupted and full of passion,” advises Loud. From there it’s important to let the LP drive the meeting if they wish to. “Don’t worry about getting through all the slides that you think are important,” Loud said. “You must be flexible to answer the question that the LP wants answered even if the sequence seems silly or illogical to you. The goal of the first meeting is to get to the second meeting.”
- Prepare a fund summary. This can be as simple as a single slide that includes such fundamentals as fund name, target size, strategy, target return, track record and fundraising status. “Going through this exercise will help to orient you to the screening factors important to LPs,” said Loud.
- Don’t overlook the importance of handling rejection well. While it may not commit this time, an LP may consider a commitment to a future fund. A good practice is to ask the LP directly for feedback and to be “polite and courteous” regardless of the answer, said Dayn Advisors’ Dayn. Also recognize that you may not find out why you were rejected. Some LPs have a policy of providing no feedback. Others have found that telling the truth can lead to wounded feelings and even heated arguments and they’ll sugar-coat their rejections.
- Consider outsourcing back-office functions as you ramp up. Ready to hire full-time finance, compliance, HR and legal professionals? Doing so will give you maximum control, but it can be costly and time-consuming. Consider outsourcing those functions in the early going, said WithumSmith+Brown’s Angell. “The most effective method from both an operational and cost perspective would be to hire an administrator that can handle all facets of the back office — such as subscription agreements, capital calls, financials, partner allocations, investor relations, and delivery of information to your investors through a portal,” said Angell. “This can take an enormous burden off the GPs in the initial startup phase of the business.” Hiring a CFO but outsourcing the rest can be a good compromise.
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