Excerpts from the article are below:
While private equity fund sales depend on a complex web of factors, one of the most critical is the ability to get existing investors to commit to a new fund – and even on how quickly they sign up, says Peter Martenson, partner at Eaton Partners, a third-party marketing firm.
“It’s basically like a reference,” he says. “Usually previous investors are the people who know the funds the best.”
Establishing team expertise and a performance track record can be a challenge for the second private equity fund of a new series, especially if the first fund is only a few years into its lifecycle and has not yet recognized revenue on any investments. One way around not having true performance data is to pull out figures on revenue or EBITDA increases in the underlying portfolio companies to show how the first fund is adding value to existing investments, Martenson says.
“What they need to show is some level of value created,” he says. “And you can’t have any blowups in the early investments. That’s a show stopper.”
A well-established brand often gives investors “comfort” that a firm has back office systems and procedures in place to “keep people away from the guardrails,” Martenson says. “So, people can take a shorter track record and extrapolate it with some level of confidence,” he says.
Firms that don’t have KKR or Carlyle’s brand advantage – and that might not check all the boxes from the Preqin survey’s top fundraising success indicators – don’t have to despair, however. There are ways to attract investors that go beyond team expertise and the returning investor rate, Martenson says.
For instance, a firm lacking an existing investor base could develop a network built on “concentric circles” of “warm references” from industry professionals and experienced investors, who can either vouch for the fund managers or put up capital that shows “they know we’re good guys and will be good at this strategy,” he says. And most of those managers should be willing to offer “preferred economics” to attract investors, including discounted management fees or co-investment options.
The one factor managers can’t work around is lacking some kind of demonstrable track record, Martenson says.
“Track record is a killer,” he says. “Not that many people want to push an ‘I believe’ button.”
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