Anatomy of a modern day fundraise

Martin Goddard chairs the Global PE report 2013/14 launch event

Last month I chaired a panel of leading figures from the Private Equity (PE) sector to launch our 2013/14 Global Private Equity report: ‘A time of challenge & opportunity’. We created a video which draws out the key findings from the report but I just wanted to share some of the key discussions points and insights from the launch event with you.

Fundraising was a key theme and the new reality for private equity funds is this: you are constantly in marketing mode. As in previous editions of the report we asked GPs around the world about all elements of the fund life-cycle, but this time we went deep on fundraising.

The picture that emerged was one of a new “road map” for fundraising. Many General Partners (GPs) pointed out that the distinction between fundraising and investor relations had blurred. Pre-marketing is now not something you do for six months ahead of a fundraise; it is something you do constantly, developing and strengthening relationships with new and existing investors.

Meanwhile, when the formal marketing process begins, momentum becomes key. An early first close with a substantial proportion of the fund is vital to gather momentum and give other investors confidence in the process. Obviously this is where extensive pre-marketing and LP pre-qualification comes in. As David Menton, managing partner of Synova Capital pointed out: having met a prospective Limited Partner (LP), it was vitally important that when you sat down with them again you could show demonstrable progress against milestones, both in terms of the portfolio and the fundraising process. Synova recently closed its second fund in less than three months.

Our report found that GPs are considering various options to achieve the momentum they need; most (63%) are considering offering co-investment opportunities in their next fund, while around half are preparing to hand out seats on their advisory boards. One quarter of respondents are considering upping the GP commitment to their next fund and a similar amount are mulling fee discounts to early investors.

Clearly the spectre of fundraising failure weighs heavy on the expectations of many GPs. More than half of those surveyed said they anticipate the use of alternative fund structures to increase over the next twelve months, with deal-by-deal funding being by far the most prevalent alternative cited.

These findings seem to point to a bleak fundraising market, with GPs having cede to LP demands and think very creatively about how to fund their deals going forward.

However, this is only half of the story. Certainly LPs are applying more rigorous due diligence and making the fundraising process more onerous. But general sentiment about fundraising prospects has improved since our 2012 report. This year 29% of GPs saw the market as either positive of very positive, compared to last year when the corresponding figure was just 12%.

The panellists at our event echoed this positivity. Laurence Zage, a managing director at placement agent Monument Group, noted that he recently met with an experienced team looking to raise a substantial amount of money for a first time fund. A year ago, he said, the prospect would have been unthinkable. Now, however, it seems an achievable – albeit challenging – goal.

The LP perspective on our panel came from Peter Schwanitz, a managing director at Portfolio Advisors. He sounded a positive note for GPs that face the prospect of trying to raise a fund with a damaged track record: a group that numbers many. He said that LPs should be willing to consider these “fallen angels”, because having tasted a loss they are often hungrier and wiser for it.

The overall picture painted by this year’s report is one of acceptance among GPs that fundraising today is a resource-intensive experience and that preparation is the only way to maximise the chance of success.