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Two years of winter:/
That’s what awaits those who did/
Not bury their nuts
We all know that times are tough for GPs out fundraising at the moment. But ask anyone on the sell-side and they’ll tell you the same thing:
2009 was horrible, but we expect things to pick up by the end of the year
A quick poll conducted by IE Consulting last month, however, suggests that times will remain tough for those PE houses out scavenging for LP commitments. Of course, the very best funds will come out and raise money. By the way, “very best funds” does not mean “top quartile” (anyone ever marketed a fund that wasn’t top quartile?). “Very best funds” means just that: those private equity and venture capital funds that have consistently delivered performance that outpaces its peers and other funds in other asset classes.
It’s simply no longer enough to be delivering better returns than other European buyout funds or other US venture funds. Limited Partners are taking a hard look at the dollars they are investing in private equity and VC funds and how the returns stack up against their other investment strategies: Commentators should not be surprised to see even committed investors into the asset class “taking stock” for a good while longer than even the most pessimistic might have expected.
So what does this mean for those in the market now, trying to raise a fund?
- Get out early. You could be in the market for 18 months or more
- Be flexible. Respect the fact that the balance of power now rests with your LPs: They have alternatives.
- Show how you are different. A longer fundraising timetable means more “competing” funds on the road at the same time. Why should LPs invest in your fund?
- Don’t forget to make the case for private equity: Is your strategy preferable to investing in the public market? How?
I remember a conversation I had in 2008 with the head of investor relations at one of the preeminent large buyout houses. After exchanging niceties and discussing the industry landscape, talk turned to their current fundraising activity. Apparently, the firm was engaged in “philosophical” discussions as to whether it should even include a market commentary section in its PPM. After all:
“everyone knows what we do and why they should be investing in our funds”
Oh, how things have changed…
You can read the full research summary from our LP poll here:
A firm should not make or offer to make any payment or other consideration with a view to enducing [sic] a third party to enter into contractual negotiations with a client
– that’s according to the Draft EVCA Placement Agents Supplementary Code of Conduct that was released recently.
Yikes. The thought that this goes on, as it clearly has, ought to be shocking. Well, it is shocking even if I feel naive writing that.
But is banning placement agents the answer? Surely it cannot be. Just because a few fraudsters want to line their pockets dishonestly, doesn’t mean that the role of an intermediary in the private equity fundraising process is unnecessary. Ask any GP running a small fund if he/she would prefer to spend more or less time raising money and the answer is pretty clear. If LPs want their fundmanagers to spend their time investing LP cash rather than trying to raise more of it, they had better accept that the placement agent is their friend or, at least, not their enemy.
Traditionally, the Venture Capital industry has taken its lead from the West. Sure there are fine firms up and down the US and beyond, but think of venture capital and it’s hard not to imagine Google’s garage or a sarcastic VC cutting through some poor entrepreneur’s far-fetched American dream (or, if it’s 1999, funding it).
Now that probes into the services that 3rd party marketing firms and placement agents offer are causing some concern, VCs need to wise-up on the marketing of their own funds. And it’s not going to be easy.
I’ve written before on certain similarities between the actions of some in the fundraising industry and of those in the Wild West. I wasn’t too complimentary, but I wonder what we can learn from the Ol’ West? Here are some quick pointers:
Firstly, if you can, it’s important to show some kind of track history. After all…
It’s better to be a has-been than a never-was.
But track history isn’t everything, of course; it might have been easy raising your last fund in ’06: You delivered 30%+ IRR and most of the LPs were reckoning on funding their commitments with distribution in any case. But, in 2009, if you can’t show how your teams delivered those returns, you’re sure gonna hear this an awful lot:
Timing has a lot to do with the outcome of a rain dance
And honesty really is the best policy; let’s hear it for bad news, told well. The amount of DD LPs are putting in these days means that it is going to be increasingly difficult to exercise that special sort of creativity that some VCs are rumoured to be indulging in with the valuations of some slightly wonky Chinese portfolio companies. Much better to open the books and tell the story of what happened and what was learned.
Good judgment comes from experience, and a lotta that comes from bad judgment.
Of course, one of the most important skills is getting an upfront read on who might be ready to commit and who is still waiting before making new commitments. It’s like they used to say:
Never slap a man who’s chewin’ tobacco.
- Show what you have done
- Show how you did it
- Don’t just tell the good news
- Wait for the right time to tell it
If you get all that licked, you might stand half a chance!
I’ll tail off now..:
Never miss a good chance to shut up.