Are you ready to go it alone?
02 Oct 2019
Joe McKenna & Ian Wiese (Investec)
Andrew Frost (Lawson Conner)
Barry Stimpson & Emma Radmore (Womble Bond Dickinson)
Eight things not to overlook when setting up a first-time private equity fund.
European first-time fundraising hit record levels in 2018, with €7.8bn raised by nascent managers, according to Preqin. Firms such as Bowmark spin-out Apiary Capital have wrapped up rapid debuts. Most recently, new arrival Novalpina Private Equity stormed to a €1bn final close. According to the BVCA, “the time taken to launch and raisea fund is now at just 13.4 months, the lowest since the financial crisis, and 30% of funds are taking six months or less to close.”1
Nonetheless, launching a new private equity fund can be challenging, especially as limited partners (LPs) look to streamline their general partner (GP) relationships. For aspiring managing partner it is paramount to establish a coherent team; present an intelligible and compelling track record; and articulate a clearly differentiated strategy. LPs will only consider taking on new managers if they are genuinely able to provide additional value. Apiary, for example, tapped into appetite for lower mid-market buy-and-build. Nordic house Summa Equity, meanwhile, captured investors’ imagination with a strategy built around sustainability.
Winning over LPs is only the beginning, of course. New managers must also strike a chord with the management teams of the companies they are looking to back. A pipeline of potential deals is essential. In fact, it is not uncommon for emerging managers to fund their own early investments in order to showcase ability before embarking on a formal fund.
But the real decision-making begins at the launch of a maiden institutional vehicle. The to-do list is lengthy – from securing a credible placement agent, to settling on the right domicile. New funds must set their optimal fee structures, arrange fund finance, define a compliance policy, ensure hedging – and resolve a thousand other factors. And the consequences of getting it wrong could be career limiting.
“It is important to select a banking partner that understands the mandate, appreciates the rationale for the facility and is willing to create tailored solutions.”
Ian Wiese , Investec’s Fund Finance team
“It appears managers are neglecting FX risk, not because of a lack of exposure, but because of a lack of time and resource, aswell as concerns around a perceived impact on capital efficiency.”
Joe McKenna, Investec’s Fund Finance team
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Sure steps at the start of the journey
Leaving behind the infrastructure, resources and processes of an established firm to a launch a new private equity fund can be an exciting – but daunting – time.
From defining a compelling and differentiated investment story, to building a team and even choosing a name, the scale of the task is immense.
It’s all too easy to see how business critical decisions around areas such as fund finance, compliance, insurance and hedging strategies, can slip through the cracks.
But getting the basics right from the outset will lay the foundation for your future, ensuring success and longevity for your fledgling brand.
Sources:1 British Venture Capital Association, First-time fundraising barometer 2018, citing Preqin data
2 Private markets come of age: McKinsey Global Private Markets Review 2019
3 Investec GP trends 2019,www.investec.com/en_gb/focus/gp-trends/2019/how-to-finance-GP-commitments-as-fund-sizes-near-record-highs.html
4 Usage has risen from 50% of funds globally five ears ago to around 90% of funds now, according to Validus Risk Management,see www.privatefundscfo.com/qa-investecs-tom-glover-future-fund-finance/
5 For more detailed analysis, see Harris Jenkinson and Kaplan Private Equity Performance: What Do We Know?(Chicago Booth University, 2013); and Larocque, Shive and Stevens, The private equity return gap (University of Notre Dame 2018).
6 Source: European Parliamentary Research Service