Five crucial issues of successful fundraising
Currently, many new fund initiatives are being taken as we see new private equity managers coming out of the woodwork and being active in the market. Family offices as well are taking steps to include a larger investor base in their activities and successful entrepreneurs start to use their experience in much wider settings such as fund management companies. Not only them, as we observe a higher level of fundraising activities among traditional facilitators of syndicates within real estate, shipping and offshore financing. Managers seem to be busy fundraising but it certainly isn’t an easy piece of cake. In today’s article we would like to discuss five crucial competences for a successful raise of a fund.
Power to lift
First and probably biggest hurdle is to convince investors that the management team has a power to lift a cost of new fund establishment and further investment, management and successful divestment of undertaken funding initiatives.
An important part of it is to prove that the manager has access to dealflow that fits the strategy, proposed fund size and investment period. If you are planning to make twenty bets of 5 million euro each over the period of three years, you need a dealflow that will allow you to make seven investments each year. You will of course need access to a much higher number of good opportunities and a capacity to screen all of them to land the seven you want to bet on each year.
The right team
Investors want to invest their money into teams with keymen who can demonstrate track record. The most successful teams are not a one-man-show which is considered fragile for funds expected to last 10-15 years. Over the fund’s lifetime, the team will need to show a variety of skills for successful management, competences through the whole value chain of fund operations, regulatory understanding, good investor network, entrepreneurial experience, business development skills, ability to operate fund structures and to reach buyers to secure a successful exit of the fund’s investments.
Choosing the right set-up
Effective from July 2013 in the EU countries (a year later in Norway), the managers of alternative investment funds have been regulated under a common regime. Further regulations have been passed and some are pending. Fund managers need to understand the regulatory regime and how it is to operate under FSA/FI supervision. These competences are defining the formal “environment” for any fund structure nowadays. Not the most appealing part of the funds’ operations perhaps, but investors expect the management team to have these aspects under full control.
To choose the right formal set-up and fund-structure is safeguarding a good start of a fund’s 7 to 15 years lifetime. Many fund managers and people who make initiatives to establish new funds simply have insufficient insight into the regulatory requirements that have been implemented across Europe after 2013.
Managing the fund establishment process
The fund manager must understand market terms and conditions, structure, compliance and risk management procedures which professional investors expect. There are good advisors in all these areas, and lawyers should be engaged to secure correct handling of critical aspects of the fund establishment. There is however a management task to coordinate the process and to ensure that money is spent wisely.
In addition to establishing the structure with compliant and coordinated agreements between the fund, the manager and investors, which requires legal expertise, a manager may most likely want to source back- and mid-office support functions from a third-party service provider to focus on portfolio management and business development. Back- and mid-office is an undervalued success factor as such providers bring critical operational experience to the table. Done well, this means that the board is reassured that risk- and compliance issues are handled correctly, and investors will receive comprehensive and correct reports on time.
Controlling the risks
A crucial part of creating stable, good returns is to avoid big losses. That is perhaps just as important as being able to pick the absolute winners. A proper risk-mitigating set of policies and procedures is necessary to hedge against unnecessary losses and mistakes, and the management team should be able to establish and follow a practical set of risk mitigating procedures.
Should you be in a situation where you are into raising your next or your first fund, you may want to consider these aspects further. For that you are welcome to contact us at: firstname.lastname@example.org or email@example.com
Oslo/Stockholm, September 27, 2017