How has the role of private fund groups changed?

While the role of a private funds group has always been to help a fund raise capital from institutional investors, managers need to look beyond a private funds group’s distribution capabilities to determine who is best equipped to help them successfully achieve their fundraising goals within today’s challenging and competitive fundraising environment.

Although the importance of a good sales team with strong relationships cannot be underestimated, it is worth digging deeper into a private funds group’s platform to understand how the advisory and project management roles will support and supplement its distribution efforts. The advisory function of private funds groups is becoming increasingly critical as the fate of a fundraising can largely be influenced by the preparation undertaken before a fund formally launches.

When scratching the surface of some of the most recent successful fundraises, it is clear that even those funds which were able to reach or exceed their target in a relatively short time period, did so on the back of months of careful pre-marketing and due diligence preparation. Smart managers are partnering with private funds groups with strong advisory capabilities further and further in advance to ensure they are appropriately geared up to go to market.

Red flag hunting

Laying the groundwork for a successful fundraising should start even before a private funds group has been engaged. The private funds group should conduct its own full diligence, which includes making investor reference calls to ensure that appetite exists for the investment strategy and that there are no initial red flags.

After gaining an in-depth understanding of a manager and its platform, a private funds group should be able to determine whether or not it is best suited to help a manager raise money based on its goals and investment characteristics such as track record, investment strategy and team dynamics. All of the information obtained during diligence can later be leveraged to identify potential investors, flag any potential investor concerns and supplement marketing and diligence materials.

During preliminary conversations, it may also become clear that a traditional fundraise is not the best method for securing capital. Given often rigid investment parameters, it is no longer the case that a traditional fundraising is always the best strategy. Investors may have more flexibility and appetite investing with the same manager on a deal-by-deal or co-investment basis. While many private funds groups will shy away from anything that does not fit within this traditional model, more dynamic private funds groups with good advisory functions will work with a GP to arrive at a fundraising strategy that best meets a manager’s goals.

Once a private funds group has been engaged, it will likely work with the manager to prepare it for pre-marketing, a concept which is now recognised as a key fundraising tool and widely accepted by investors. These days, most managers will engage in some form of pre-marketing whether they admit to it or not. A good private funds group can help focus pre-marketing efforts to achieve the maximum impact. While this form of marketing can come under various guises and can take from a few weeks up to a year, the goal of pre-marketing should be to: i) meet new investors which are good prospects to invest in the next fund; ii) get on an investor’s radar screen to ensure a manager’s fund offering is taken into its allocation decisions for the foreseeable future; and iii) obtain candid investor feedback which will then be helpful in structuring the fund’s terms and communications strategy.

Making up ground

With other points being equal and given the wide spectrum of managers to choose from, many investors shy away from investing with managers which they have just met during the formal fundraise, gravitating towards teams with which they have built up solid relationships. While it is not ideal, if a manager has been relatively inactive in its investor outreach efforts in between fundraises, much ground can be made up with the guidance of a private funds group which has strong (and ideally influential) relationships with the LPs that it covers.

Unless the private funds group is up-to-date on investors’ allocations and appetite, a lot of time can be wasted meeting with the wrong investors. It is important to partner with a group which can make relevant introductions at the right point during the fundraising process to ensure that the manager gets on the appropriate investor’s radar so that relationships can start being built and the fund is considered as part of a manager’s allocation decisions.

Pre-marketing is also the ideal time to obtain candid feedback from investors which is less likely to be as forthcoming during the formal fundraise when the purpose of meetings is to try and raise money versus the introductory and relationship building nature of these earlier meetings. While investor feedback may not be expressed directly to a manager during a meeting, follow-up conversations with a private funds group can be helpful in ensuring that, by the time a fund is launched, key benchmarks that have been identified by investors have been achieved and any issues or questions that have come up previously have been rectified or clearly addressed.

During the pre-marketing phase, there is still opportunity to ‘sound out’ potential terms and ideas which can then shape a manager’s story as well as thoughts on terms and fund structure. Many investors value having their input taken into a manager’s consideration, which demonstrates that the manager is sensitive to investor feedback, potentially creating a stickier relationship.

By carefully listening to investors and consulting with a private funds group which has relevant fundraising experience, a manager is more likely to enter the fundraising market with terms and a fund structure that will be well received in the market. On the other hand, if a manager’s proposed terms are too off-market, much time can be wasted on the road and some investors may resist giving the fund a second look if the terms do indeed ultimately change. In the event that a manager has a good reason for having particular terms, a private funds group can help to communicate the rationale behind these features, addressing these discrepancies head-on to minimise confusion or negative reactions.

Administrative burden

Finally, the more preparation that can be done from a diligence perspective in advance of a formal fundraising, the better. Since the global financial crisis, the level of diligence that investors require to make an allocation has increased substantially across asset classes. While this can pose a major administrative burden for a GP, a well-resourced project management function within a private funds group should be able to shoulder much of the heavy lifting by taking the lead on creating the relevant suite of marketing and diligence documents and, more importantly, giving guidance on what investors are likely to require as part of their diligence process.

The more time spent preparing a fund for market, the more efficiently LPs will be able to do their diligence, which in theory should contribute to a faster fundraise. Although many investors will have some specific diligence requirements, a private funds group which has been actively raising funds within the same asset class and speaking with similar target investors, should be able to anticipate most of the questions that will be asked.

The success of a private funds group will always be benchmarked against the speed of the fundraise and the quantum of new capital raised. Nevertheless, success in today’s market is not achieved by distribution capabilities alone, but includes a carefully considered fundraising strategy with significant preparation. By providing the right level of guidance and support, a private funds group can help a manager best maximise its chances of success by ensuring that it is as well equipped to enter the fundraising market as possible.

Jennifer Band is a member of Evercore Partners’ private equity fund placement team in London, with a primary focus on origination and project management in the European market