Hi, I've raised a few PE funds that were very successful at growing their AUM (>$2bn raised). I also headed cap intro for a big Wall Street investment bank, in a non-US region. I've also been involved subsequently in several consultancies for capital raising, and in several failed PE capital raises. Happy to answer questions on capital raising, what funds do right, what they do wrong, what GPs fail to understand, etc.
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Can you point in the direction of "Capital Raising 101" - maybe a book or primer on the subject for those of us who need a refresher - to inform some better questions than ones we could find just googling?
Thx for your note. Richard Wilson has a free PDF online that's a 101 guide. I'm not saying he's so awesome or that the guide is so great, but it is a starting point. Not sure of others.... Maybe some of our fellow monkeys here can help.
The guys of ParkerGale have chatted about this topic at least once in one of their Private Equity Funcast.
if you had to describe your job to a 2nd grader in 2-3 sentences, what would you say?
What kind of pedigree do LPs like to see for funds between $250M - $400M?
Pedigree? You mean, what kind of performance data? Or do you mean, you plan to raise such a sized fund, and want to know what background you need to have first?
Both, specifically as it relates to raising from institutional investors.
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Yes, this is what I was going to say too. I 100% agree with PersonofWalmart.
The original question from M_1 asking "What kind of pedigree do LPs like to see for funds between $250M - $400M?" did not make sense to me, so I wanted to clarify. LPs don't care even one little bit which school you went to, or even much about which bank you went to. They care only a little bit about what fund you came out of - so if you did 10 years at KKR, Bain Capital, or a top performing niche fund, that will help.
All LPs will care about your deals and the performance. It's pretty cut and dry. If you led a famous few deals, and they delivered outstanding returns, and your startup team for the fund worked together for a while, then you have a shot at raising a fund. At no time has anyone ever asked me where I went to school. They want to know which funds you worked at, what deals you did, and what your performance was. They will want to see consistency in strategy, team cohesion, and a "secret sauce" about why your fund needs to exist and why you will win.
all else being equal. better pedigree will have an easier time raising capital. Also, have seen research that mutual fund outperformance is more correlated to SAT scores (which should be correlated to undergrad) than historical performance.
I would think there is some merit to that. a Fund can have good historical performance if it gets lucky/invests in a positive beta asset class. But managers with better analytical skills (better SAT, undergrad) will likely have some edge over time.
lastly, there is less career risk for an allocator to provide capital to a start up fund run by 2 Harvard grads than founders w/ less pedigree
@Personofwalmart
As an LP, would you ever invest in a BB prop trading RV quant strategist/trader who wanted to start their own fund? Track record totally internal and no way to audit...but have the ability to re-implement the strategy (interest rates relative value / stat arb) and can describe the strategy in a way that makes sense to the LP.
What would you need (not economics, but what kind of strategist) to be the 1st investor in an emerging manager coming from this setup. This strategist/trader coming off the prop desk has not previously published their ideas publicly (because it was all done on an internal prop desk)
I'm asking because the only other option for these type of traders is to take a role at a multi-manager hedge fund....but the economics to the trader are much worse when going that route (flat 15% of P&L....vs 2/20). In the short run, its better to just take the 15%...but in the long run as assets get bigger....the multi-manager platform favors the owner of the fund over the traders/PMs that are doing the actual investing/trading.
Any sectors/industries that you have seen have issues raising capital recently?
First time funds are always hard to raise - and that's true now also. Healthcare is on everyone's mind, but many LPs feel they get plenty of HC exposure through generalist funds.
Where do most first time funds fail in the fund raise process?
they fail to plan for Armageddon and think fundraising will be easier than it is. You need to launch with LPs that are already backing you, and have enough money to do a first close at 50% of the targeted fund amount. If you can't raise from your previous contacts, it's unlikely new prospects will give you money.
Can you elaborate on Armageddon?
Also, what is the best way to introduce yourself to LPs for prospective fund raisers?
What kind of criteria would LP's be looking at for emerging industries like crypto or cannabis? Any advice on what kind of LP's to approach and how to feel out their interest?
That's a tough one. Tons of potential in cannabis IMHO. But many institutional LPs may shy away. Probably will need to find HNWs to back this strategy.
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I see lots of people raising for crypto. Most are going to HNWs or principals of VC funds. There are nearly no institutions willing to back crypto funds.
I think it is also interesting that some VC funds are taking the FoF approach where they’re seeding crypto funds out of their flagship funds. Some examples include Union Square Ventures backing Placeholder capital and Multicoin Capital. The Foundry Group has also helped to seed other VC funds
Could you tell a little bit more about your raises for HFs? Any general details are fine. I've fantasized about starting a fund but have neither the capital nor the connections for that.
I was head of Asia cap intro for a major Wall St bank. If you don't have the capital or the connections, don't do it. You're not ready. There's a 'Valley of the Shadow of Death" whereby you're screwed if you cannot launch w/ at least $30mn so that your mgmt fee covers your expenses, esp for staffing up and building a compliance infrastructure. The market is littered with many decent PMs running tiny sub-$30mn shops that will have trouble raising because they aren't institutional quality. They just limp along.
What is a good checklist for a first time fundraising hopeful?
It comes down to product, market, process. I had an easy time raising $1.5bn in 2008 after Bear Sterns' collapse, because our product rocked and we had a strong soft-marketing process. Now I struggle to raise even tho market is good, because the product I'm saddled with sucks. My methods haven't deteriorated - if anything they've been honed.
Good product =
Stable team that's worked together for a long time Secret sauce = able to have some way of generating extraordinary returns that others cannot replicate Solid 20%+ returns consistently in the past Strong risk control / compliance / legal / backoffice Ability to add value (in PE) to portfolio companies Good DPIs (liquidity matters, not just paper gains) Other LPs are blue chip and speak well of you Transparency with prospective LPs (share obfuscated pipeline if needbe)
Thanks. This is very informative. And what about fundless sponsors, who have identified targets and just need money on a deal by deal basis? How does that change?
Also, you don't want to launch w/o capital. By the time you announce you're raising, you need to have had quiet conversations that account to soft commitments for 50% of the target raise.
word to the wise for HF recruiting - the cap intro desks of all the banks keep bundles of CVs on hand for when HFs are looking for staff
Have you seen bankers (without PE experience) successfully raise funds? If so, what Was the evaluation criteria?
Yes, but only in very rare circumstances. I work in Asia, and because Chinese PE was a new industry, over the past decade there were quite a few well-connected ibankers starting PE funds (Hopu, Primavera, Everbright). I've not really seen this be the case in more developed markets though. Think about it - competition for the capital is from spin-offs from PE funds that are exiting with track records in their hands. But maybe if someone's enough of a big-wig they can overcome.
I was in Cap Intro during the recession. Trying to raise capital during that period for sub $100mm funds was definitely not a pleasurable experience. How were you able to push through? Thanks.
I think the recession sucked donkey ballz for everyone. After Bear collapsed we pushed thru on the fundraise we had been tee'ing up for some time (when I was still at the PE fund). This was successful because we had an amazing product, Another thing that made the PE fundraising successful is that we'd already been soft-marketing it for 2 years, so it was just about closing checks. Then after we closed the fund, I got laid off, because hey, "mission accomplished, we don't need a foreigner anymore." So I had to go into CI to keep bills paid.
Can you recommend any firms/funds that do PE fundraising? It it possible to break into it without other finance experience?
Look up "placement agent" online. I don't think it's impossible to break into it without other experience, since it's so specialized. But it's a pretty niche type role, so you can't go from there to too many other things. You'll just be a capital raiser on a go-forward basis, period.
when you say "thats a good question" to an LP, are you lying or are you lying?
This is comedic gold. Can't believe I'm the first to award an SB.
hahaha
What are your tips for someone looking to start their own small private RE fund (think 100M)? I have several friends who have heard my pitch and are committed to 100k+. I don't need 100M to get started, I could work with as little 1M, but it would force the strategy to stick to one locality. Anyway.. I am essentially asking how does one ramp up and get the first major investor?
If you've got $1mn, start with that and build track record. Maybe do this on the side while you work at a bigger REPE firm. 100mn is not that small a start.
Thank you, Earthwalker. Anything further on where/how to pitch for smaller investors while building track record?
With the growth of the secondary PE market (particularly in the GP-led segment/ staple deals) does your role ever intersect with a secondary advisory practice? When those situations come up do you pass across to a specialized secondary colleague or so you manage it?
Some firms and banks do this secondary marketing, but this was not something I've been involved with.
if a small hedge fund has $5mm in AUM but has top quartile returns, how do you suggest growing AUM?
Create some managed accounts for friends and family and bootstrap it. Also if you've really got such amazing returns, put the info on Eurekahedge and hope the money flows to you. At $5mn the problem is you cannot afford proper back-office and infrastructure which makes you too risky for most professional/institutional investors, unless you're subsidizing it yourself.
at 5mm AUM....if your risk metrics are within acceptable tolerances (0.5-1% daily VAR at 95% confidence...max loss under 5% with a 10yr backtest...risking 7.5% to make 20% per year) and if your strategy can scale to mange 100mm+, then you should apply be a PM at a multi-manager like millennium. PMs get paid ~ 15% of P&L. After a few years of good performance, you can then raise your own fund (possibly just get seeded by the Multi)...so that you can collect 2/20 , instead of a flat 15.
What do salary/all-in comp structures look like on the fund raising side?
I've seen the full range. Some funds under-value their capital raisers. Others make their head of fund formations full partners in the fund. That would mean getting carried interest - or at least commission on funds raised. A good metric as to how seriously you're being taken, and how you'll be treated is salary. I have seen some folks coming from IBD background get paid as low as $150+bonus at the VP/director level (it sucks), and I've seen some people come in, and get a major piece of the fund if it is raised successfully. Range on % of capital raised goes from 0.5% to 1% of capital raised + retainer.
Fundraising process/workflow tips? CRM? Deck length? Content? Advice on closing prospects?
What's the typical duration from getting the initial point of contact to having the money in the bank from institutions and HNW investors?
• Best Practices: o Qualify your leads, pre-screen your contacts - 90% is knowing who to speak to, and if they have $ for your strategy o Softmarket – market your strategy and fund when you are NOT in fundraising mode o 50% first close – don’t announce fundraise until you have much of the capital already raised; aim for 50% first close o Keep top of mind – have frequent & short contacts; use short emails/messages o Dataroom – use Lightserve, keep it ease for LPs to view your docs; use tiered VDRs; enable downloads for stage 1 o Materials– have a teaser, a short deck, a long deck, and an extremely long deck (much of VDR); PPM less important o Visits – drop people a note when you’re in town, in order to try to connect o Tracking and contacting – GoogleSheets, PipeDrive, etc. Invest in Preqin o Placement agent – worth getting if you can afford it. You tend to get what you pay for. Ask for references. o Social media - worth doing and having a presence
>CRM?
I use Google Sheets with a mail merge plugin that works in Chrome. It's basically like an Excel that does mass mailing, which means that I can fully leverage it just like Excel and even cut and paste from Excel. This is brilliant, because I pay an exec assistant to organize the sheet for me (after all, it's just like Excel). And I can have multiple copies of the database saved as backups, and have currated / chopped up versions of the database. That means that I have a separate Sheet for each city, and when I go visit there, I just mail merge email everyone on the sheet. "hi I'm going to be in NYC in 2 weeks. Would you care to meet up?"
>Deck length? Content?
I use a 1-2 pg teaser, a 10 slide short deck, a 30 slide long deck, and a 100+ slide full DD deck for late-stage capital closing.
>Advice on closing prospects?
strippers and beer? Get them so drunk they sign anything? F- if I know. I suck at closing. I leave that to others that I tag-team off to. I suppose that's why I dislike IR and capital raising so much.
Hey guys, I'm thinking of turning this topic into a WSO webinar or full-blown AMA. Do you think there would be interest in that - in like a 1 hr webinar? Would there also be interest in a longer series as a course? Can you guys give me an exhaustive list of the topics and questions you want covered? I can then make sure to answer them all at once. cheers!
I'd definitely be interested in at least an AMA - would like to learn more about how roles and day-to-day work differ at cap intro vs private placement groups at banks vs independent placement agents, primary vs secondaries, juniors vs seniors on your teams, raising for HF vs PE vs institutional sales for AM/mutual funds. I've seen a little bit of information on some of these but not in-depth nor consolidated.
Also, I'm extremely interested in doing something similar down the line (just finished undergrad) and would love to get your perspective on my particular path - let me know if you'd be open to a PM.
Edit: apologies for dragging up an old-ish thread
Thanks for your detailed response. Very helpful.
Webinar would be great. A live AMA would be interesting too (IG). Then you can save and re-purpose the content edited down to the best questions and answers and share on all platforms.
Talk to the WSO guys. They have a large enough IG following where you wouldn't have to pre-promote your QA.
Can you provide any suggestions for a startup HF? and how to land consulting clients for starting new funds, I have good contacts in the HF space and know the service providers, brokers and all the complete HF setup tools.
Here are my broad thoughts about what LPs are looking for, and some best practices I've noted.
Without more info, I cannot advise better.
Perhaps you can elaborate.
What I will say is that for most HF managers, it's better you grind it out at a famous shop, build a decent track record, and line up a patron or two before you strike it out. You don't want to launch w/ less than $30-50mn, because below that you cannot support a decent fund infrastructure.
Without infra, few LPs will want to jump on your fund due to risk and compliance factors. So we used to call the sub-$50mn funds drifting around as being in the "valley of the shadow of death."
Just one redemption away from collapse and unable to get themselves out of the doledrums, even with good performance.
• LP Requirements:
• Best Practices:
What do you like about capital raising / your job? Back at generalist IBD pool, people use to complain whenever they got DCM / ECM mandates. Curious to know how the other side thinks!
I didn't particularly enjoy capital raising.
However, i will say it was much more enjoyable representing a high-returning sought-after product rather than a mediocre product.
That may sound obvious, but it really is an extreme difference, even if there's only a slight difference in the products.
That is to say, when I was at a well-branded fund that was returning >30% IRRs, LPs were finding us, showing up at our office, engaging us actively, asking interesting questions, spending time doing real analysis work, etc.
Interacting with smart deployers of capital, and engaging actively in interesting dialogue was intellectually stimulating.
When I was at a mediocre startup fund, returning mid-teens IRRs, NO ONE AT ALL was returning my emails and calls. My day involved 10 hours of cold emails, cold calls, researching out what LPs invested in our peers and trying to hustle up meetings. Going to conferences was a chore, because you are hustling for meetings that the LPs may not want to give you.
Bottom Line: if you're thinking of joining a fund, make sure you pick a winner, because you are tied to that product for years. When you work for a good-returning fund, with a brand, it's a far more interesting and rewarding job than when you work for a ho-hum fund.
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