Raising a first time fund can be extremely challenging. What are some things to think about when contemplating a new setup?
Having screened more than a hundred GPs in the Indian market over the past three years, it would be safe to say that our private equity practitioners are a highly dynamic group - and quick to evolve. We have seen a number of industry veterans going independent this year. I believe this spells good news for the development of the private equity ecosystem. Having said that, raising a first time fund can be extremely challenging. What are some things to think about when contemplating a new setup?
Let Your Team Shine – Personality driven first time funds seem to be the flavor of the market. Very often there is a highly accomplished and charismatic individual leading or even dominating the fundraising efforts and marketing meetings. What I have found, that works quite well, is shifting some of that responsibility to other members of the team. I have to say that my conversations with the “second-in-command” or the Principals/Directors have always been the most enlightening. Ultimately, we want to be backing an organization, not just one specific individual.
Maintain High Reporting Standards - One of the biggest concerns when investing in a first time fund is the quality of reporting standards, vis-a-vis a more established fund. This point is often undermined in preliminary marketing meetings, but is one of the key ingredients in a successful GP setup. Given our exposure to the Indian market, we have seen the good, bad and the ugly when it comes to quarterly reporting. And it really does reflect a lot about the GP. There is no such thing as a ‘perfect’ standard, but it is definitely worthwhile spending time and energy understanding what your LPs want to see and how to get it right.
Share Co-Invest Opportunities – With a number of sophisticated institutional investors with large AUMs, co-investment opportunities are clearly an attractive way to maximize upside. It also provides LPs and GPs an avenue to establish closer ties and share expertise. For the first time fund, it may entice investors, and rest assured, the effects are long lasting. Carry sharing with LPs or reduced management fees are other initiatives that we have come across, and it seems to have worked quite well for some first time funds.
Have a Clear Vision – There a number of instances where we met with first time funds, and surprised to learn how such little thought has been put into the long term vision for the organization. Is there a succession plan in place? Do you want to be the next Warburg Pincus? Or expand into real state? These are things to think about. And the answer can be very telling.
Set Realistic Goals – We are seeing first time funds are raise anywhere between $100-$400million. Given the tougher fundraising environment and increased level of competition, setting realistic expectations would be wise. It may be good idea to put serious thought into how large the first fund really needs to be, and how much time can you afford to spend on fundraising. Patience is definitely not overrated in this industry.
Keep it Simple – It can be overwhelming to receive a presentation, a private placement memorandum, an executive summary, a reference list and a long note soon after the first meeting. Marketing and due diligence ‘ammunition’ should be used in a selective manner, so that LPs have time to digest the information bit by bit.
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