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WSO Free Modeling Series - Now Open Through
April 30, 2024
9 Free Financial Modeling Lessons
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
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+Bonus: Get 27 financial modeling templates in swipe file
Capital & good timing
This. Funds that started at the bottom of 2008 have killed it, obviously,
so theoretically, any rich kid can create the next big HF even without prior big-name experience working at a bank
Working in investment banking at Goldman Sachs in M&A doesn't make you automatically a good investor
Convincing people to give you money is a huge part of raising a fund. So a rich kid could start a fund if it was just funded with his/her own family money. Otherwise, it would be hard to convince anyone to give a kid with little to no experience, millions of dollars to invest.
Willing and interested investors. If you can't sell your strategy to investors, doesn't matter how good your ideas are.
Even before selling your strategy, how does someone build out a book of potential investors? Even if you have a convincing investment strategy, it seems like acquiring capital is a difficult task in the current investment environment. My only thought would be approaching current clients or those you've previously pitched. Besides that... cold calling/emailing?
Typically new funds/inexperienced managers have a tough time raising capital. One avenue these funds explore is retaining a fundraiser to sell their story and reach out to their contacts. Many times those 3rd party marketers will actually be vetting the fund, though, as they don't want to stick their neck out to their network if the strategy makes no sense or the manager doesn't understand what they're getting themselves into. The drawback to hiring a 3rd party marketer is that they take a percentage of assets raised, usually with a predetermined minimum amount to determine the success fee. Back in the day they'd be retained upfront but that structure seems to be going away.
Need an audited track record to get any real money. No one is going to give you $ without a demonstrable record of returns (and not something like 30% CAGR because you had a 270% return 5 years ago on one penny stock trade), has to be a repeatable strategy that you can pitch. Even then it will be tough finding "accredited investors" (SEC constraint) if you don't have a personal network to tap into.
More importantly you need money to get money. The institutional investors (the real money) will often have a minimum AUM they need to see before they can invest and they'll likely also have other constraints like they don't want to own more than 10% of the fund or they don't want to see another investor owning more than 10% of the fund.
Agreed, that is how I understood raising capital to work and it seems logical. That's why I don't understand how guys in their twenties are able to raise decent sized capital with no track record at all. I guess you can charge minimal management fees?
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