PE fundraising best practices in a competitive mid-market

By James Williams

Recently, PEwire discussed how mid-market PE managers are adopting fundraising best practices to attract investors in an increasingly competitive marketplace, in collaboration with FIS, the global fintech firm behind Investran, Data Exchange and FIS™ Private Equity Rainmaker.

Fundraising over the last two years has remained buoyant, reaching USD566 billion in 2017 and USD426 billion in 2018. Through the first half of this year, an estimated USD210 billion has been raised according to Preqin and encouragingly only 19 per cent of funds closed so far have failed to meet their targets. 

This is good news for mid-market managers as they strive to compete for institutional dollars with large-cap managers, who continue to exert a huge gravitational pull. Last year, the Carlyle Group raised USD18.5 billion for Fund VII, EQT raised USD12.44 billion for Fund VIII and as PitchBook research shows the megafund trend continues. Over the first nine months of 2019, US PE firms raised USD191 billion (almost as much as 2018), with Blackstone Group launching a USD26 billion buyout fund and Vista Equity Partners launching a USD16 billion fund.

These are huge numbers, so how can smaller players stand out?

According to Robert Spittler, Managing Director at the Silverfern Group, large institutional investors favour global PE groups with strong brand identities because they need to write large equity cheques “but on the other side of the equation, it also creates an opportunity for smaller players like us to speak to institutions as they look to complement their PE portfolios with new strategies”. 

Part of the attraction for LPs sticking with established names and doing re-ups when new funds are developed is that it allows them to deepen their GP relationships. 

Tatyana Kratunova, Product Strategy, Private Equity GP/LP/Service Providers at FIS, says a huge amount of due diligence is required to enter a new fund “and we have seen from our clients that this process has become much longer over the last five years”. 

“Emerging managers need to concentrate on their overall market perception when it comes to fundraising,” she said. “Whether that’s ESG, operational functions, or market technology, in order to allow them to concentrate on what matters most.”

And what matters most is doing successful deals and demonstrating that they have the ability to truly generate operational alpha in the companies they invest with. 

Ryan Parker is the CFO at Mercato Partners, a Utah-based PE group which focuses its investment efforts on growth companies in the technology and branded consumer markets. 

“I think investors are looking for a unique sourcing method, or model,” he said. “Some way to show that you’ve got a systematic approach and a data-driven approach to identify investable assets that align with your investment thesis.”

For new PE managers launching their first fund, even though they might have had a tremendous reputation at their prior firm, they have to convince new investors that they can replicate that magic in their new fund; from a fundraising perspective, this is not easy when there is no track record. 

“The ability to demonstrate how a deal has been sourced and managed through its entire lifecycle is certainly something investors are looking for,” said Parker, before a manager even thinks about setting up a fund structure. 

That deal-by-deal approach is exactly what the Silverfern Group has been doing over the years building its mid-market investment platform and building a bridge to investors by offering them selective co-investment opportunities. 

“The way we work with LPs is that we invite them into single transactions,” explained Spittler. “We do this on a core investment basis. They get a chance to better understand the investment experience… they can follow us on a transaction, see the materials we use, they can speak with the team, understand how we work with management teams etc. 

“With this core investment approach, investors come on to our platform and what we hope is that this will be much easier for us to then make the next step and commit to new funds; we are raising a new fund currently. In this context, institutions like the approach much more than having to face the binary decision: do we commit into a blind pool or not?”

Sometimes, the art of fundraising comes down to approaching the right investors at the right moment in time; maybe an LP is about to exit one mid-market fund and you just happen to connect with them serendipitously. 

Connect early with LPs

Reflecting on what Mercato have learnt when fundraising, Parker said one of the key lessons has been how long the lead-time actually is when it comes to bringing a new LP on board.

“Especially with a institutional investor who has to go through an internal process to underwrite us and get comfortable with the strategy. I think what’s clear to us now is the importance of starting a relationship as early as possible pre-fundraise. This can help understand an investor’s allocation preference. So start that dialogue early and then maintain it throughout the process leading up to the fund raise,” advised Parker.

In such a crowded space – one in which investors are bombarded with pitchbooks from managers – it is vital for managers who wish to optimize their fundraising process to communicate effectively, and creatively, utilizing a range of distribution channels. 

At Silverfern Group, the team uses video content to share information with investors “which they can consume at a time that is convenient to them”, remarked Spittler. “Also, it gives investors the opportunity to really learn about who we are and to better understand our investment experience, prior to making a capital commitment.”

Investors need time to build trust but equally managers should themselves take the time to figure out if a prospective investor is a good fit for the fund. One of the disciplines of successful fundraising is identifying, as objectively as possible, investors who will stick by the manager over the lifecycle of the fund; which in most cases can be up to 10 years or longer.  

Demonstrating clearly how the GP intends to add value in each target company acquisition in the portfolio is also a key factor in the fundraising process. Some investors specifically seek out specialist managers with deep domain expertise. They want to learn about a manager’s value-add story and how they work with portfolio companies to drive operational improvements.

“We have an operating platform that provides that deep domain expertise,” said Parker. “As we’ve spoken to Limited Partners, that’s certainly something they’ve been interested in hearing about. We also speak at events and host our own events where companies can come and learn and understand best practices. This has helped us become a thought leader.”

Technology data platforms and providers are providing LPs with a clearer insight into how managers are performing relative to their peers. This can help when hitting the fundraising road, as managers hone their investment pitches and provide investors with more metrics on deal performance.

“It comes down to communicating across multiple channels with your LPs. Data rooms are much more interactive and as I mentioned, we provide video content on specific topics for investors to have information in a convenient format,” said Spittler. 

But he also warned: “There are some things you should not digitise. As an LP you want to see into the whites of the eyes of the PE manager you are potentially going to give millions of dollars to, so things are still very analogue. At Silverfern we still travel a lot and do traditional roadshows.” 

“Technology should be at the forefront of the fundraising process. Some investors are becoming more sophisticated and we believe managers will begin to take a more dynamic and tech-savvy approach as they look to align their goals with investors,” concluded Kratunova.

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