Setting up a new PE or Venture fund – Raising Capital

Now that you have prepared your plan and your materials, and have your permissions, structures and advisers in place, there is nothing to stop you reaching out to investors and hoovering up commitments to Excellent Fund I.

You (or someone else in your team) may be an experienced capital raiser, however this is one area where many first time managers look for outside help. The challenge, of course, is that most first time funds are seen as a risky proposition by placement agents, the industry specialists at raising capital from private wealth and institutional investors. This is for a number of understandable reasons:

  1. First time funds tend to be relatively small and most placement agents work on a commission basis, charging a percentage of the capital they raise (often alongside a retainer and other fees, which may be recouped against the future commission payments). As the effort required to raise a small fund is similar to that required to raise a larger one, it is inefficient for placement agents to take on too many small mandates.
  2. First time funds tend not to have a very full track record, which can make investors more nervous about the ability of the fund to deliver a return. In fact, more generally, the lack of data around a first time fund and its team can be an issue for investors.
  3. First time funds will also be unlikely to have developed any relationships with investors beyond the personal networks of the team. This means that many relationships are “new”, typically requiring much longer for an investor to commit, again impacting the efficiency (and profitability) of the fund raising exercise for the placement agent.

Placement agents might seem expensive, often charging as much as 2% of capital raised plus expenses and other fees, but raising your first fund successfully is SO important that you may well see this as good value. In this case, making yourself attractive to a placement agent can be an important step. Ensuring that your documentation and materials are high quality and that your proposition is clear, easy to grasp and compelling will save you time, whether you manage to hire a placement agent, or not, but doing these things correctly make your fund “easy to sell” and that can really get a placement agent interested, particularly if the agent can see a future of more (probably larger) follow-on funds. For a placement agent, supporting a first-time fundraise is a risk. It is an investment in the client you might become a few years down the track. However, having a placement agent is also a sign to potential investors that they have evaluated your first time fund and think you are a good enough bet–a strong signal of support–so worth pursuing if you can.

To support your fundraising activities, you will probably find it a good investment to create an online presence that provides a basic level of information about your fund and your team, as well as the investment strategy. It may seem simple to launch a website, but, without the proper permissions and without a suitable disclaimer, it is easy to incur the wrath of the regulator. Your legal adviser should be able to advise and draft a disclaimer detailing what kind of investors are permitted to view the website.

Once this work is complete (and even before, in fact), you should start to perfect your pitch. Pitching your fund to other members of your team is an excellent way to identify strengths and weaknesses and also build consistency. You may find it helpful, if a little daunting, to video your performance and then watch it back – you will soon see areas to work on and repeatedly practicing like this is a good way to improve.

You are now ready to meet some investors but when do you do the first close? We’ll look at TIMING THE FIRST CLOSE, next, in PART 6.