A new team may not have a track record of investing together, but a demonstrable record is still essential.
Charlie Eaton, founder of Eaton Partners, says three to five years managing $300 million to $500 million is preferable. “Can you work with a manager that’s only raised $30 or $40 million? Perhaps, but it would have to be a compelling and unique strategy.”
The “gold standard”, says Karl Adam, a director at Monument, is “full, written attribution for all relevant investments from a prior employer showing key deal data”. A dealmaker may have to settle for a letter confirming the investments they played a senior role in, or they may have to reconstruct their own track record.
DO TARGET INVESTORS WHO KNOW YOU
“Go to your friends first,” says Adam Turtle, co-founder at Rede Partners. “The people who are most likely to back you early are people who know you already, and people who don’t know you already will wonder why people who know you already are not backing you.”
“I’d like to see three to five investors that have followed them and are committed to the new fund,” Eaton says.
DO BE AS SPECIFIC AS YOU CAN ABOUT STRATEGY
Be precise about the kind of deals you plan to do: show examples of companies you want to invest in and a good pipeline. If you can do deals as a team, so much the better. “Consider making several ‘on strategy’ investments as a proof of concept before launching the fund,” Adam says.
DON’T GIVE UP TOO MUCH FOR ONE INVESTOR
Getting to a first close is a milestone for a debut fund; once you start investing capital, you have more to show potential LPs. But be wary of what a cornerstone investor might be asking you to give up.
“Other LPs will be highly allergic to any outside influence on the team’s investment process or governance,” says Adam.
DON’T UNDERESTIMATE HOW HIGH THE BAR IS
Investors won’t cut you much slack because you’re raising your first fund; they will be comparing it with the eighth or ninth of a more established manager.
“Investors will expect you to have all the capabilities required to invest their capital, either in the team on day one or identified on day one, and they will compare you against fully fledged alternatives in looking at that,” Turtle says. “They’re typically not paid for taking business risk.”
DON’T FAIL TO DIFFERENTIATE YOURSELF
If investors can’t find any differences between your strategy and that of an established and successful manager, you’re unlikely to win them over.
“Identifying market gaps and how you’re filling that market gap is an important part of first-time fundraising,” Turtle says. “Pitching that you’re different and that you’re addressing a market that isn’t currently covered by lots of other people is very important.”
“Almost every PE firm claims to have proprietary sourcing and distinctive operating value-add,” Adam says. “Carefully articulate what sets your strategy apart.”