Last week, All Raise hosted a panel targeted to emerging managers — what advice can we provide to managers that are not yet established, ie, managers that are raising their first or second institutional fund (maybe their third). As one of the founders of Equity Summit, I was asked to participate. In preparation for the panel, I reached out to 59 institutional LPs with a short survey regarding the fundraising climate for emerging managers. Here is what I found out.
- Adjust your Fund Size.
- Expect fundraising to take longer.
- Concentrate on LPs you have met before.
- Use this time to build relationships over Zoom.
- Acknowledge situation and expect to give more information to LPs.
- Be patient and take a long term perspective.
- Emphasize why they should invest in you (as always).
Those of you interested in more detail on the LP responses, keep reading.
Details on a recent LP survey
The survey was carried out to gather advice for emerging managers, which refers to managers who are raising their first or second institutional fund (maybe their third). I reached out to 59 LPs with the survey and 34 responded (that’s 57% response rate!). I expect more responses will trickle in since I sent it only four days ago. I plan update the results accordingly. LPs are interested to share their input and be helpful. Out of the 34 that responded there were: 11 fund of funds, 9 endowments, 5 foundations, 5 large family offices, and 4 large portfolio managers
I asked three questions.
Question 1: “Will you invest in a manager that you just meet over zoom?”
- 44% said no
- 47% said they didn’t know yet
- 9% said yes
It looks from these replies that emerging managers will have to wait to meet LPs in person to fundraise effectively.
Question 2: “Given the current environment, how are you changing your plans regarding adding new managers to your portfolio?”
- 44% said that there had been no change in strategy and they will add the same numbers we had planned.
- 29% said that there had been a change in strategy and they will add less managers than planned
- 17% said it would be very hard to add a new manager, only under very special situations
- 15% said they would add no new mangers
So in summary, expect it to be harder to raise money this year even if you are able to meet the LPs in person
Question 3: “What is the best Advice you can give for managers raising at this time?”
Since this was an open question, I tried to group the answers in categories and I am including some direct quotes. As you will see, this is practically the same advice we give founders.
- “Have an MVP Fund Size”. It is OK to raise a smaller fund that you had in mind. Figure out how to adjust your strategy to the smaller fund.
Be patient. Have an MVP fund size where your strategy works and consider bringing your target now. Focus on existing relationships. Close on what you have committed if it’s enough to get you “in business.”
Close what you can and invest your strategy and hen come back to the market earlier than planned.
If you can’t hit your target, LPs won’t hold it against you for the next fund given the market environment. Raise as much capital as you can without sacrificing your strategy or diversification, and leverage co-invest where you can. You’ll get credit for showing that you have discipline and have executed your strategy exactly as you told LPs you would.
Declare victory with the money you’ve raised and live to fight another day
It may make sense to raise a smaller fund, particularly is round prices / sizes drop.
- Expect fundraising to take longer. Just like with venture investments, things are taking a longer time.
Extend your fundraising period in your LPA for 18–24 months from the time of the initial closing.
Make your current reserves work for as long as possible given a fund raise will take longer than expected (basically the same advice your’e giving to companies!)
Fundraising periods will be extended and it is going to be difficult to build new relationships.
- Concentrate on LPs you have met before. Again, this is the same advice we are giving founders. It is easier to connect with folks that you have met before.
Work the pipeline of LPs prior to COVID or have a pre-existing relationship versus net new LPs.
Circle back with any LP you had previously made a connection with. I’ve been much more willing to engage in an “update” call/zoom than schedule a true new manager intro call (mainly because I don’t want to waste their time or mine) given our scaled back deployment pacing for 2020, potentially 2021.
Concentrate on your existing LPs. With denominator effects, LPs are figuring out how to cut back allocations. They are not looking for new risks, especially with emerging managers.
- Use this time to build relationships over Zoom. LPs are also at home and they welcome connecting with managers so it is a good time to start an introductory call.
LP’s are more willing to meet over Zoom than ever, so take advantage of this window to make initial contact with targeted groups. It will lay a path for easy follow-up in person requests down the road.
Be patient, and make best use of Zoom time. Get to the questions that really matter to LPs: your thesis (and how it’s different), why you win, your track record, and your pipeline. The other stuff is great (team build-out; your firm’s values and culture; non-differentiating background details like your time at GSB), but don’t spend more than 2–5 minutes on these topics unless the LP specifically asks. These Zooms run together so we need specific data points that make you stick out in the monotony!
Obvious but necessary advice — use this time to establish solid long term relationships. An LP may not commit to your current fund but if you’ve established a trusted rapport, they may commit to the next.
We have spoken with and continue to meet with our clients via phone and Zoom during this interesting environment as well as checked in with much of our managers currently in our pipeline of approved managers with whom we have allocated capital. That said, the ability to work from home has provided us with more freedom to think, be creative and make contact with new and interesting managers. Zoom is a great platform so please reach out to us with an introduction, your deck and we will get back to you if there’s interest with next steps.
- Acknowledge situation and expect to give more information to LPs. In this uncertain environment, volunteer to over-communicate with LPs.
Be honest, transparent and fair about everything. Communicate to an excess.
Communicate often with your LPs on fundraising timing as they look to plan 6 months out.
Do not be dismissive of the level of uncertainty in the markets.
Now more than ever, be prepared to walk through how you plan to approach portfolio construction. How many investments? Avg size of initial investment/total reserved for follow-ons etc. Emerging managers often overlook this crucial component of managing a venture fund, instead focusing principally on how they’ll source deals, but it’s also important, particularly in this environment where the availability of upstream capital isn’t a sure thing!
- Be patient and take a long term perspective. LPs are also under a lot of stress, dealing with their own portfolios so it is important that you acknowledge this and don’t rush them.
Be patient. Understand LPs are under stress too, SIP, WFH, SFH, some of them are facing liquidity and other business (schools, hospitals etc) pressures.
Easier said than done, but remain patient and remember at the end of the day, this is a very long-term game. If the goal is to build a sustainable, institutional asset management firm, building LP relationships now, even if they don’t materialize, will be helpful in building the firm long after COVID-19.
Take a long term perspective. This too will pass and this is a great business to build a career in if you can raise capital and invest successfully!
Give LPs some time and space but pick a target date/quarter for a close to keep them focused. If you push for answer from an interested but not yet committed LP right now, expect a “no.”
- It is also business as usual. Just as in good times, LPs want to know “why should I invest in this manager” so as always, it is important to have a clear and concise answer to that question.
Continue to emphasize and define competitive advantages in the ecosystem and differentiation
Same as always: have a clearly articulated set of reasons and examples of why founders would choose your capital over an overwhelming sea of competitors
Thank you to all the LPs for participating in this survey.