It’s widely accepted that the current conditions for fundraising are tough right now. A multitude of factors like macroeconomic uncertainty, high interest rates, and changing investor demographics have added up to what a majority of respondents to our recent state of fundraising survey have called some of the most challenging fundraising markets they’ve seen in years.
And yet, we’ve seen some of the leading funds find strategic levers to pull to hit their targets well within their timelines. They’re expanding their investor demographics and geographies and increasing the use of placement agents. And there’s still optimism: they think the markets will improve and their strategic fundraising approach will net them commitments on target with their expectations.
In this webinar, our panel of highly experienced and successful private capital fundraisers generously agreed to share their unique insights into fundraising best practices to not only attract new investors and keep your existing investors engaged between raises:
- Jo-Ann Patneaude, Managing Director of Investor Relations and Fund Administration from Webster Equity Partners
- Jason Jerista, Head of Investor Relations at LLR Partners
- Michael Wagner, Managing Director at Touchstone Group
View the full webinar recording below, and read on for a summary transcript.
What's the biggest factor of your fundraising success?
Jo-Ann: Relationship building. We spend a lot of time with both our existing investors and prospective investors outside of the fundraising process, making sure people understand who Webster is, what our strategy is, and what our focus is, and that they're meeting not just members of the IR team, but also with our partners and MDs. We don't just have them meeting the team and doing diligence when we launch a fund.
Jason: To us, it's understanding how LPs make decisions, what their process looks like, then supporting them with what we believe to be one of the strongest data rooms in the business. It allows them to get up to speed very quickly and have the data that backs up everything that they've been hearing from me and my partners at each step along the way.
Michael: We had a venture client that we spent Q4 2020 to Q2 of 2022 fundraising with a target of $600 million. The biggest factor in the success, and it was a pretty successful fundraise, was timing, coupled with differentiated marketing. The strategy that this client was pursuing had major tailwinds behind it, so there was massive demand for either LPs looking to allocate into that sector and strategy, or at the very minimum, looking to gain knowledge about a relatively new technology.
It's sort of a cliche that timing is everything, but in that instance it really was. We must have scheduled 200 to 300 meetings and we did a lot of interesting marketing which paid off, but little of that would've mattered had there not been demand in the market for that offering.
How do you qualify your competitive advantages to LPs?
Jason: First, we focus on the areas where we think we're the best and back it up with facts and data. And we really want to have the data in the data room for LPs to validate the story for themselves.
We make a point to ask the right questions. You have to understand what they are seeking, as well as what they are seeking to avoid. You need to ask those questions upfront: all too often, GPs go into meetings and are so eager to tell their story that they forget it's a conversation.
The critical part is to understand what LPs are looking for and how you can help them to build the case internally about why your strategy fits into that part of the equation for them. Listening to what they need, asking the right questions, and keeping the story factual, honest, and backing it up with as much data and as many examples as possible.
Jo-Ann: I think Jason hit the nail on the head: really understanding what an investor is looking for is the first step. We qualify our investors very quickly. We have a single sector focus in healthcare, so if they aren’t looking to fill a healthcare mandate or their current portfolio construction is already heavy in healthcare, even if it's with a generalist investor that has some healthcare exposure, they're likely not a great fit for us.
But even though someone might be heavy on healthcare today we might put them in a “stay in touch” bucket, but they're not going to get crossed off our target list entirely. As opposed to a situation where you have LPs who won’t invest in a GP that has a billion dollar fund. Our last fund was over a billion dollars, so automatically those investors were not a great fit for us.
And then there's understanding what the reason is behind why they didn't come into the fund. How do you stay in touch with them, keep them educated, and build those relationships over time? One of the things we find is that you can't knock on their door in fund one, and they don't come in, and then you only knock on their door again when you launch fund two. You have to stay in front of them over the interim period so that they understand who you are, how you think, how your strategy works, and they get a chance to get to know you.
Michael: As a placement agent, we're looking at strategy, team, and track record, which is the lens that LPs look through when they evaluate a fund. The evaluation process that we go through is similar to what the institutional LP is looking for. They're looking for a differentiator. What is that differentiator? Is it their approach? Is it their sourcing? Is it their expertise? Is it the pedigree of their team? Are their returns stable and repeatable? Are there any anticipated exits that will meaningfully kick up their marks during the marketing period?
Something a lot of emerging managers don't realize is that the institutional LP has an existing portfolio, a series of expected re-ups, allocation targets, and a view about what exposures they want to expand and contract. So if we come to them with a healthcare offering but they’re looking for blockchain—if we're selling lettuce and they're buying hamburger—it's not going to happen.
However, many LPs will take a first meeting because they're mapping the market, especially if it's an associate or an analyst. They want to learn the market and meet new GPs. Some of our clients only want us to get meetings with LPs that are ready to allocate to that sector and that strategy. Other LPs want to take any meeting they can get because they want to build those relationships. So we're very client specific in that we try and figure out what's the best fit.
If it’s an informational meeting versus where they’re ready to commit, that's an opportunity for the GP to develop a relationship along the lines that Jo-Ann and Jason were referring to. That LP might not invest in first-time funds but building that relationship means it’s easier to reach out to them on the second or third fund and when your track record is more mature. Those are all opportunities to hopefully ultimately get a commitment at the next cycle.
How do you get in front of enough LPs to understand if your approach is working?
Jason: If I knew which 30 phone calls to make at the beginning of the year, I'd only make 30. It's not that easy. You certainly want to have a high conversion rate and you don't want to waste anyone's time, especially your own. Sometimes you do have to be a bit more judicious and say, "we could take this meeting, but it's not going to go anywhere". You have to weigh that decision.
It's about identifying what is the profile of an LP who's likely to invest in your strategy, but also casting a wide enough net. We know it's competitive out there, and as much as we like to kid ourselves that it's not a numbers game, in many ways, it is. You create your own luck.
It's about segmentation as well. There are plenty of data sources out there, like Preqin, PitchBook, eVestment, and Dakota. They’re all solid sources to get information on investors in particular segments and geographies.
One of our origination professionals likes to say: “know the difference between ‘no, not now’ and ‘no, never’”. That helps you figure out how you can be most useful. Even if your fund isn't inside someone's mandate, they may be good connectors. Can you help make introductions for them? Can you provide them with market data that's helpful so that they can help share your story with other people?
You've got to fail quickly in this business. There are plenty of investors out there. You're not going to convince someone overnight. You're not going to change their worldview in one meeting. And that's where, to Jo-Ann's point, the relationships matter so much. Over time, they may change their mandate, they may go from one plan to another, and you want to be part of that dialogue.
At the same time, you want to be genuine and you're not going to force your agenda on them. You can continue to keep them apprised of your progress so they can build a file on you, understand your growth, see that you do the things that you say you're going to do. Try to find pockets of capital that may better align with the strategy that you offer. Perhaps it's exploring a different channel, like wealth management and RIA, for example. Or perhaps it's going to a different geography that may not have the type of exposure that you're providing.
Jo-Ann: Where we at Webster excel is really staying in front of investors and prospecting all the time outside of the fundraising process. It's really understanding out of the gate that you're qualifying prospective investors for your strategy and quickly identifying whether they’re a good fit, or after an initial meeting that they're not and you need to walk away from that and not feel bad about it. You just have to know and just move on.
If you’re trying to have 200 meetings with new LPs at the launch of a fund, you're really going to have a hard time with your conversion rate. Getting people to add you to their existing GP list and just getting them to engage is going to be really difficult without that relationship building at the beginning. For Webster, it's really important.
In some cases, you can have a lot of good existing flagship investors that can help you convert some good key prospects. It’s invaluable to have people echoing your message and telling other LPs that they've had success with Webster, not just from a track record perspective but also that we're really good partners. We have robust co-invest programs so people like to hear from other LPs that we don't just say we offer co-invest, we actually do. That's what's important for us.
How do you tailor your pitch for different audiences?
Jason: In keeping with the theme of knowing your audience and doing your homework in advance, understanding whether this is a program that's been investing in private equity for the past 25 years, or is perhaps a bit newer to investing in PE is important to understand to tailor your pitch. They are going to have very different questions and very different processes.
Are you simply replacing an incumbent who has strategy drift or team issues, or are you perhaps the first investment in this particular asset class? Do you need to be the educator and explain the asset class, and then explain how you fit into that ecosystem? Ask questions to gain an understanding with whom you're speaking and what the key points relative to their sophistication are, what their experience is, and what their process looks like.
Jo-Ann: It's often more than just IR going out and speaking to investors, so we tailor our pitchbooks to arm the team with information for whatever direction the discussion with LPs might go in. We have a very tight Webster talk track that all the team can speak to: our strategy and our historic investments; then we build out a really robust appendix that allows our team to flip to the relevant data as questions arise and avoid having to tell an LP you’ll come back to them later.
It's really arming the team with as much information as possible, so as we get to know LPs we can answer their questions real time with the information they're looking for. I think that's been helpful to us.
Michael: We'll try and identify both strengths and deficiencies for our client, then make sure that they're in a position to respond to questions as the LP asks them.
Tailoring is really important, and echoes what Jason said about qualifying the LP. Because LP organizations are continually evolving, they might have a new CIO that is less bullish on private equity than their predecessor. So your view about that organization's attitude towards allocating to PE may have completely changed. You can use databases for initial research but, in many cases, the information on those CRMs or databases can be quickly out of date or inaccurate.
The gold standard is to have an initial 15-minute conversation with the LP. Often they won't do that unless we have an opportunity they're interested in, in which case we'll have a qualifying call to really understand why they want this meeting. Is this information only? Are they looking to allocate? We can then communicate that to our clients so that they can be prepared for the kinds of questions that the LP is going to ask.
Beyond that, we advise our clients to be respectful in the meeting and sensitive to their audience. Some LPs like to engage in a dialogue from the get go and they don't want a pitch. We typically begin by asking LPs to tell us about their investment program, which will give additional information to what we've already found out during a qualifying call. Then they often say they just want to have a dialogue and possibly flip through a deck.
But others want to hear a pitch first and then engage in a Q&A. Another thing we advise our clients is not to go into a rote 15-minute pitch, but pause after a few minutes to ask if they have any questions or if their earlier questions have been answered. These meetings are two-way conversations. It's not just someone pitching and someone receiving.
How do you see fundraising changing in 2024?
Michael: There's a little more optimism. If you look at the surveys, half the market remains pessimistic while half the market is slightly more optimistic. And there are still a lot of inflated valuations that are fueling that pessimism in the short term.
I read a report in Venture Capital Journal that, for venture, was one of the most pessimistic predictions for 2024 in terms of relationships with new managers. Really dark. Private equity is slightly better. And I think that we can’t ignore the great deal of uncertainty in the global macro environment: we still could go into a recession, there are two wars raging and creating all kinds of geopolitical uncertainty, which I think is giving investors pause and making them a lot more selective.
But I would say that in the second half of 2024 we might see a meaningful uptick in deal activity. I think sellers are going to start capitulating on price to some extent.
Jason: Based on some conversations we've had of late, it seems like there is a change in the tide and the environment's not going to be quite as challenging as it has been for perhaps the past 12 months. It’s still not going to be easy, yet it does seem like there might be a bit more liquidity coming back. Exits are starting to happen. LPs may have a bit more capacity to make investments compared to what we may have seen over the past six to 12 months.
LPs are most likely going to start getting distributions back from PE. We're seeing an uptick in deal activity, both as buyers and sellers of companies. Hopefully that additional liquidity helps facilitate future investments in the asset class to create a net positive, although it's still going to be a challenging environment for all of us.
Jo-Ann: We're seeing a little light at the end of the tunnel as well. But, echoing what Jason said, I think liquidity is really going to drive what we see from investors. They need to see some money back. I think they have a lot of money out on the table, in a lot of different asset classes, not just private equity. And I think that's going to help. Knock on wood, it looks like the market's going to open up a little bit in 2024 and that is a hopeful sign for those of us out raising capital.
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