Guys, Below is a Q&A podcast + some key takeaways on fundraising for PE and HFs. I was in-house IR at a couple PE shops (1 successful, 2 not) and was head of cap intro at a BB ibank. What questions do you have for me? I'll do my best to cover / answer them all.
WSO Podcast: Private Equity Fundraising, Cap Intro & Investor Relations Career Paths
Member @earthwalker7" joins us again to give the listeners a deep dive into fundraising best practices for private equity funds, LP psychology as well as the various roles and career paths available to Investor Relations (IR) professionals. Hope you enjoy (listen below).
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18 Thoughts on Fundraising
LP Requirements:
- Consistent returns – LPs would rather a consistent 20% return than experience volatility
- Consistency of team - team must have worked together for a long time, doing this same strategy
- Consistency of strategy / track record –you’ve executed this strategy successfully previously
- Unique edge – an ability to create opportunities and value that others cannot
- Best in class – be #1 in your geography / industry / investment type
- Transparency always – share pipeline info (obfuscated), wide dataroom, share co results, learn your lessons
- Appropriately sized funds
- Institutional quality – strong back-office, risk mgmt., incentivized team
Best Practices:
- Qualify your leads, pre-screen your contacts - 90% is knowing who to speak to, and if they have $ for your strategy
- Softmarket – market your strategy and fund when you are NOT in fundraising mode
- 50% first close – don’t announce fundraise until you have much of the capital already raised; aim for 50% first close
- Keep top of mind – have frequent & short contacts; use short emails/messages
- Dataroom – use Lightserve, keep it ease for LPs to view your docs; use tiered VDRs; enable downloads for stage 1
- Materials– have a teaser, a short deck, a long deck, and an extremely long deck (much of VDR); PPM less important
- Visits – drop people a note when you’re in town, in order to try to connect
- Tracking and contacting – GoogleSheets, PipeDrive, etc. Invest in Preqin
- Placement agent – worth getting if you can afford it. You tend to get what you pay for. Ask for references.
- Social media - worth doing and having a presence
Thanks for doing the AMA and call.
Three questions:
1.
You mentioned on the call that in cap intro there is a linear progression for advancement within a BB (analyst>assoicate> etc) and I assume EB as well MM. Would compensation follow the same typical progression you find in IB or is it more related to S&T? Meaning once you learn the business, as a junior to mid employee (VP & under) do most BB's pay a % of the commission to your team earned on the cap intro(s)?
2.
I'm going into S&T out of undergrad but I am very interested PE fundraising or HF cap intro space. What would be the best way for someone to lateral into one of these positions?
3.
How difficult is it after you spent a good amount of time say in the cap intro business(6-8 years+?) to strike out on your own and start on firm where hedge funds hire you on contract to do this kind of service?
> #1. You mentioned on the call that in cap intro there is a linear progression for advancement within a BB (analyst>assoicate> etc) and I assume EB as well MM. Would compensation follow the same typical progression you find in IB or is it more related to S&T? Meaning once you learn the business, as a junior to mid employee (VP & under) do most BB's pay a % of the commission to your team earned on the cap intro(s)?
I speak only for my BB experience. But I'm unaware of MMs or EBs doing cap intro. One exception - I think there was one group - NewEdge - which you can say is a micro prime broker doing cap intro. But otherwise, no, MM/EB don't do prime brokerage so no need for CI.
Yes, you sit on the trading floor and are part of ST, specifically you are prime brokerage (the brokers to HFs). Cap intro does not get a fee from HF clients, so can't really pay you commission. Moreover even when I knew my intros and marketing helped land $XXXmn to a fund, they won't necessarily give us credit fully, or won't trade with us in a sufficiently increased amount, so how can I get commission attribution? Rather, you get base + bonus, which is generally tied to group bonus.
Interestingly, I had a lot of HF prospects offer my BB money to have me do cap intro for them. My bank refused.
That is because if you want this cap intro, you have to come aboard as a client. One can't sample the fruit without paying full freight - and that means being a client and hitting the bank's minimums. A MM or EB won't have the full prime brokerage function, so no HF broker fees, so no cap intro.
FYI - The tiering is pretty much as follows: 1st tier = GS, MS 2nd tier = UBS, CS, JP Morgan 3rd tier = Deutsche, Citi, Jefferies 4th tier = Nomura
> #2. I'm going into S&T out of undergrad but I am very interested PE fundraising or HF cap intro space. What would be the best way for someone to lateral into one of these positions?
Cap intro sits on the ST desk of prime brokerage. Moving from ST to PE is difficult. I've not heard of it done. Theoretically I guess if you were a good salesperson, you could maybe get a PE shop a chance to let you do capital raising for them. But you'd be hard pressed to make the argument that the ST capability could translate into doing deals in PE. That just wouldn't make sense.
> #3. How difficult is it after you spent a good amount of time say in the cap intro business(6-8 years+?) to strike out on your own and start on firm where hedge funds hire you on contract to do this kind of service?
Could you learn the cap intro trade, build the contacts, and then strike out on your own? Sort of.
A cap intro person could go outside, and join a HF as head of capital raising / IR. I've heard of cap intro people joining the founding team of a HF. And I've heard of cap intro people going out and being freelance capital raisers.
Earthwalker,
Thanks again for taking the time to share your insights. Similar question to #2: Also a recent grad but am going into institutional sales for a large AM (and should have exposure to our alts and credit investment teams as well). I also have past internships in PE and IB. Does this background make sense for moving to a placement agent in the future?
How soon is too soon to start building your rolodex if you know you want to start a fund some day? Where do you go to find LPs? How do you make the ask - very detailed of asking for quantity of money and in what environment? I would like to have a clear picture of where I go find these people, how I convince them (you've covered this pretty well via track record) and how to ask them for money.
The best time to start building the rolodex is yesterday. You should be cultivating the personal relationships with LPs as early as possible. Try to get opportunities to participate in fundraising, and always be cultivating relationships with LPs along the way. Your initial capital when launching a fund is people you've worked with in the past. There are very few seeders of new funds out there.
> Where do you go to find LPs?
If you can attract a top tier placement agent, that can help. Once you have your own base of funds, you would want to get intros from existing LPs to other LPs. You typically go on roadshows to major cities and try to meet with family offices and other LPs.
> How do you make the ask - very detailed of asking for quantity of money and in what environment?
Usually it's a gradual process of getting yourself known to LPs. Then once you have socialized the concept of them investing into your fund, and you think you've soft-circled about 50% of your fund target, then you announce that you do a first close, and that kicks off your fundraise.
could you elaborate on social media?
social media - the bigger PE funds and HFs stay off social media. But startup funds and VCs really do need to use social media these to get their brand built and get their message out there. I think GGV does an excellent job of this. If you check out GGV on Twitter or Facebook they put thought-leadership opinion pieces out there, put up their partners' talks at conferences, etc. It helps to build a brand, and that's key when you're fighting for airtime in a crowded market.
.
To be more clear - there's BIG variance between the various (PE) placement agents.
The top tier - UBS, MVision, Credit Suisse, Lazard, Park Hill, etc.
Then there's the next tier down (I don't want to name names)
and then there's the whole slew of FAs and smaller players running around, able to raise.
If you are able to get a top-tier placement agent to take on your fund, then you should consider them seriously. However, if you've managed to attract such a top-tier placement agent, chances are you're a top-tier fund and then you start wondering if you'd be better off just doing your own raise and save on the fees.
The perverse thing is that placement agents only want to raise for funds that LPs would be dying to get into.
Fund selection is the key to successful placement. It takes MORE work to raise for a mediocre fund than for a great fund; it's harder to get LPs to take meetings, it's harder to close checks, and 'shoveling sh*t' GPs destroys your credibility with LPs quickly.
So good placement agents want to raise for funds with really strong returns, and tend to favor established funds or carveouts from established players.
That means that the vast bulk of startup funds have trouble getting a top-tier placement agent.
I've only once had a placement agent on a fund I was attached to. They didn't do that much for us. But it was a boutique investment bank, and my former CEO signed them up on a no-retainer success-fee-only basis. That reduced their incentive to work on our fund. They ran our product by a number of their usual clients, got limited interest, and didn't really chase the opportunity the way that a properly-incentivized placement agent would.
For some GPs though, the placement agents do a great job of managing the process, bringing in leads, etc.
You are paying for 4 things with a placement agent:
1) a global salesforce that is constantly speaking to LPs - ie. access. Hence an ibank like UBS with 30-50 people globally can do much more for you than a local boutique that has to take you around the world, but has just 2 guys trying to phone in to LPs.
2) validation - LPs know that if a top placement shop has taken you on as a client, you are a top fund, and they take that phone call seriously
3) showing you the pathway and best practices - Raising a fund isn't rocket science. In fact, it's a predictable, repeatable process. LPs are looking for certain very specific traits in their selected GPs. And there's a process to be run just like with any capital raise, where there's a methodical marketing, preparation of quantitative and qualitative data, a crafting of a story, coaching of management, being selective about which investors to approach and how, etc. A good placement agent can tell you tidbits like "Don't announce your intention to fund-raise until you have already soft-circled 50% of your targeted fund size among friendly LPs first, on the DL. That way you create scarcity value and a sense of urgency/FOMO right out of the gate. It also buys you more time because you often contractually have 12 months from the start of your fundraise to the end. So better to start w/ at least 50% in the bank." Rocket science? No. Complex? No. But it's valuable insights like this that you get from a placement agent that has done this thing before.
4) execution and heavy lifting - No matter what, fundraising takes time. That's time your deal team should be spending actually doing deals. A placement agent frees up some of mgmt and deal team time, and you get value from that. Some placement agents actually have their practice divided between deal execution worker bees and sales people. Those worker bees turn out your materials, organize your dataroom, get your DDQ in shape, etc. The placement agent might answer a lot of the inbound questions as well. There's value in that also.
So the lesson is : try to get the top placement agent, otherwise the value is far less. In many cases, hiring a small placement agent may even not be worth it.
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What are your thoughts on outsourcing a fundraise for tech startups/growth companies?
Good strategy?
I know some entrepreneurs in my area that are outsourcing in exchange for equity. My opinion is that this can be a good strategy - further aligns the interest of the company and fundraiser, and incentivizes fundraiser to make any subsequent capital raises successful.
depends. Kind of seems like you'd get negative selection bias. Facebook in 2006 is not likely to want someone to raise for them. Crappy tech companies might, but then it's a harder raise, and you'll have worthless equity.
However I think Jason Calacanis (sp?), the author of Angel, will disagree. He believes that angel investing is the place to be, and that if you're not able to put in your own $, then advising is a good way to get equity. And you can do capital raising to get that equity, certainly.
Very good insight. Appreciate it!
Without getting too detailed, I currently work as the in-house sales/marketer for a fund within a larger organization (think 5-15B). I've also been with a third-party marketer/placement agent in the past.
I think earthwalker7 makes a lot of good points. The work/life balance can be very good, and if you get lucky with a solid fund at the right part of the cycle, it can be very lucrative.
A couple points to note: - Depending on where your firm is located and how it's structured, you may end up doing a ton of travel around the globe - I think it's extremely important to be organized (who'd you reach out to? when? what exactly did they say back, if anything?) I take super detailed notes because you're not going to remember the context of a prior conversation 6 months down the road when they ask you to "circle back at the end of Q3." - A deep understanding of your fund is paramount. You need to be able to speak on it while you're at the bar - you never know who may be an allocator (this is dependent on where you work/live as well).
I agree with all of Acquisition Indigestion's points except the lifestyle part. I didn't find the lifestyle balance good at all. The deal professionals all worked hard, but I worked harder. With deals, there's clear deliverables and an end to the cycle. I've always got another LP to call, another person to catch up with, another check to close. I just ran in to a peer at another firm, which had a strong 700mn closing. He said he worked 3 months straight without a single day off, or a single day outside the office (except for travel to see LPs). So, not in agreement on the lifestyle part, but the other points I concur.
I think this depends on the specific fund/culture. earthwalker7 i have a feeling raising capital for PE is a little more against the gun. To be clear, I’ve done both PE and HF, but am currently at a HF. I’d be willing to bet due to liquidity the lifestyle is more lax. I have no “hard close.” My job is to basically raise money - always, but I’m on no strict deadline. That can also be attributed to the success of the fund and lack of capital constraints that we currently have.
Interesting note to point out. earthwalker7 would love to catch up through dm
Thanks for doing this earthwalker7!
Could you please speak to salary at PE/HF shops for in-house IR/fundraising roles as you move from analyst up? Do seniors in IR ever see carry?
I think base salary is similar to deal professionals, but bonus is much more tied to how much $ you bring in. In my mind that is not entirely fair, as a lot of the success is tied to the product's quality. As for carried interest - it depends.
It depends entirely on the firm. Enlightened ones are generous, but many are stingy.
What do you see as the “ideal” background/path to PE/HF shops for in-house IR/fundraising? If you could go back what would you have done differently, either from a career or skills perspective?
I am not sure there's an ideal. You could start off as an LP that moves over, or as someone who starts as a junior IR person and develops upward, or as a deal professional that starts to do more IR over time, or as a banker who moves over from banking.
To be clear, I think if you have any interest in investing and deals, IR will frustrate the hell out of you. It certainly has done so for me.
Why does IR frustrate you -- is it due to being all talk, no action?
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