Fundraising

I was digging through EDGAR to investigate a recent start up HF. The fund paid $2 million to a fundraiser to raise $100 million and $50 million came internally from the fund's founders. I was unable to determine if the fundraising firm will receive additional incentives in the future.

Anyone know anything about the fundraising business? Will they raise $100 million for anyone that cuts a check for $2 million or are there other barriers to entry?

Comments (8)

Jul 3, 2013

$2M seems steep for $100M, but I'm not that familiar with the payment structure. But a placement agent won't take on a mandate if they don't think they can raise the money, otherwise it hurts their "track record". Also, the better placement agents won't take on a mandate unless its sizable enough for them, since they have limited capacity.

Jul 3, 2013

I guess I'm more or less trying to focus on if they will raise the money for anyone if the price is right or if they will only raise the money for people that have a solid background/credentials?

Edit: A recent article in Business Insider and was posted here said $100 million AUM is really the minimal requirement now to have a decent shot at running a successful hedge fund. Accumulating $2 million to fork over to a fundraising agent seems like a pretty realistic goal if running a HF is your life goal. Much easier than raising $100 million by yourself. In my opinion anyway.

Competition is a sin.

-John D. Rockefeller

Jul 3, 2013
Hooked on LEAPS:

Edit: A recent article in Business Insider and was posted here said $100 million AUM is really the minimal requirement now to have a decent shot at running a successful hedge fund. Accumulating $2 million to fork over to a fundraising agent seems like a pretty realistic goal if running a HF is your life goal. Much easier than raising $100 million by yourself. In my opinion anyway.

How would you define "successful hedge fund"? I completely disagree with the statement that you need at least 100mm to be successful. I don't see how capital is a constraint for certain strategies. Obviously you can't be a distressed fund with 20mm, but successful L/S equity funds could be any size.

Best Response
Jul 3, 2013

The $2 million was likely a percentage of capital raised. People will only invest in you if you have a track record. This fund's founders have been successful enough to be able to pull together $50m; I'm guessing their track record is pretty stellar.

It doesn't work that you pay $X to raise $Y. You pay a percentage of capital raised as is typical in most banking deals. The groups that handle this are typically called Capital Introductions or Placement Agents. One of the BBs that I worked for managed theirs out of ECM, but I'm not sure if that's typical. Many of the shops that serve these roles are boutiques.

Jul 3, 2013

In what capacity was the fundraiser raising capital for them? I would tread very carefully here as security regulations dictate that only registered broker-dealers are allowed to take commissions (e.g. percentage of fund raised). Third party or even in house fundraiser typically are compensated wit a retainer plus discretionary bonus, the latter must not be explicitly linked to amount raised. Although in practice, well...it is a stupid law but you have to find ways around it.

Many BB as well as boutique IB firms (e.g. Evercore, BBH) have their in house capital introduction (for HFs) and Private fund groups. I know the capital intro people are typically linked to their prime brokerage business and don't get paid by clients for promoting the funds. They are essentially loss leaders that help the banks get other businesses from the buy side customers (e.g. prime brokerage, cash management, fund administration, custodian and trustees etc.)

Private fund groups might indeed get a percentage of capital raises for PE funds they work on. My firm has never used them so I am not really sure on this. Perhaps someone more knowledgeable can shed some lights on this?

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Jul 3, 2013
bmcrhino:
Hooked on LEAPS:

Edit: A recent article in Business Insider and was posted here said $100 million AUM is really the minimal requirement now to have a decent shot at running a successful hedge fund. Accumulating $2 million to fork over to a fundraising agent seems like a pretty realistic goal if running a HF is your life goal. Much easier than raising $100 million by yourself. In my opinion anyway.

How would you define "successful hedge fund"? I completely disagree with the statement that you need at least 100mm to be successful. I don't see how capital is a constraint for certain strategies. Obviously you can't be a distressed fund with 20mm, but successful L/S equity funds could be any size.

http://www.businessinsider.com/how-to-start-your-o...

"The days of starting in your bedroom with $1 million raised from friends and family are over, and even starting in the $20-50 million AUM range would be tough.

I've seen some people start with $100 million and eventually grow much bigger, but even at that level a high percentage of your fees will be eaten up by infrastructure and expenses other than employee compensation."

I hope your right but apparently recent regulations have made it a lot more expensive to start a HF.

Competition is a sin.

-John D. Rockefeller

Jul 3, 2013
brandon st randy:

In what capacity was the fundraiser raising capital for them? I would tread very carefully here as security regulations dictate that only registered broker-dealers are allowed to take commissions (e.g. percentage of fund raised). Third party or even in house fundraiser typically are compensated wit a retainer plus discretionary bonus, the latter must not be explicitly linked to amount raised. Although in practice, well...it is a stupid law but you have to find ways around it.

Many BB as well as boutique IB firms (e.g. Evercore, BBH) have their in house capital introduction (for HFs) and Private fund groups. I know the capital intro people are typically linked to their prime brokerage business and don't get paid by clients for promoting the funds. They are essentially loss leaders that help the banks get other businesses from the buy side customers (e.g. prime brokerage, cash management, fund administration, custodian and trustees etc.)

Private fund groups might indeed get a percentage of capital raises for PE funds they work on. My firm has never used them so I am not really sure on this. Perhaps someone more knowledgeable can shed some lights on this?

It just says that sales commissions were paid out as 2% of the aggregate. Knight Capital was the primary fundraiser. I guess they are a broker dealer?

Competition is a sin.

-John D. Rockefeller

Jul 7, 2013
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