1st time direct lending fund fundraising

Based on the most helpful WSO content, here are some insights on raising a first-time direct lending fund:

Risks in Raising a First-Time Fund:

1. Investor Skepticism: Many LPs (Limited Partners) are hesitant to commit to first-time funds due to the lack of a proven track record.
2. Capital Flakiness: Investors like HNWIs, family offices, and private banks can be more flexible but also more unpredictable, with the potential for quick redemptions.
3. Infrastructure Demands: Without a robust infrastructure, it can be challenging to attract institutional investors like pensions and endowments, who demand significant resources for compliance and risk management.
4. Market Competition: The direct lending space is highly competitive, with many new funds emerging regularly, making it harder to stand out.

Expected Fund Size:

• Initial Fund Size: For a first-time fund, raising between $30 million to $50 million is a common target. This range is often referred to as the "valley of the shadow of death" because funds below this threshold struggle to support a decent infrastructure and are at risk of collapse with just one redemption.
• Investor Types: The fund size can also depend on the types of investors targeted. For example, smaller funds might attract more flexible investors like family offices, while larger funds might aim for institutional investors.

Additional Considerations:

• Track Record: Having a referenceable track record, deal lead/PM experience, and a built-out team can significantly improve fundraising prospects.
• Market and Product: Fundraising success is often 65% product, 25% market, and 10% process. A great track record can help overcome a bad market, but a bad market will make things much harder.
• Time and Effort: Fundraising is a total grind and can be incredibly time-intensive. It often takes longer than expected, so be prepared for a prolonged effort.

These insights should help you understand the risks and expectations when raising a first-time direct lending fund in the lower middle market.

Sources: Starting a Private Equity Fund/Firm, How to raise a fund - what I know, and what I'm clueless about, Starting your own Fund/Firm, What should I know before starting a Hedge Fund?, Q&A: Credit Analyst (Multi-Strat Credit Fund) >$5bn Fund