December 21, 2018
Interviewed by: Privcap
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First-Time Fundraisings: Challenges and Opportunities

A would-be GP thinking about raising a first-time fund needs to be aware of the time and financial commitment such a venture requires, according to three veterans of the fundraising market. By contrast, LPs who generally refuse to invest in emerging managers should know that the ability to place capital with a successful, established manager is becoming increasingly constrained.

A would-be GP thinking about raising a first-time fund needs to be aware of the time and financial commitment such a venture requires, according to three veterans of the fundraising market. By contrast, LPs who generally refuse to invest in emerging managers should know that the ability to place capital with a successful, established manager is becoming increasingly constrained.

First-Time Fundraisings: Challenges and Opportunities

David Snow, Privcap:
Today, we’re joined by David Conrod of FocusPoint, Terry Mullen of Arsenal Capital Partners and Rudy Scarpa of Pantheon. Gentlemen, welcome to Privcap. Thanks for being here.

David, you also advise first-time funds, which are obviously considered to be the hardest type of fundraise. What advice do you give to someone who says, “I’m going to spin out” or “I’m going to raise my fund for the first time”? Would you tell them to start doing right away?

David Conrod, FocusPoint Private Capital Group:
If it’s more than just themselves, that’s a big help. I think it’s a tough decision in a lot of cases; they’re not really entrepreneurs and they haven’t thought about it and there’s a great deal of venture capital risk that you have to evaluate starting up in the firm. A lot of these guys have never run a business before and they’ve never had a CFO. There’s a lot of decisions right out of the box that they haven’t made: finding an office space, getting an IT system, etc. What are their core values? Are they going to develop a consistent culture? Who’s on that management team? Have they ever worked together?

Terry Mullen, Arsenal Capital Partners:
I get a lot of calls from people looking to start first-time funds, because we did, and my first response is “Really think hard about this, because it’s going to take you twice as long and cost you twice as much money than you think it’s going to take, and it is hard and a lot of people have this misconception that’s really exciting and going to be fun, but it’s a lot of hard work.” That said, there are over 5,000 private asset firms in the world today. They all came from somewhere; so many people have gone through this process. But it really is a trial and elimination process, if you will. The best talent, best strategies, what the points of differentiation are—all those things come through that very arduous process. And you learn a lot. As a GP, there’s actually a lot of value. You get a lot of feedback you don’t want and, if you actually go address your soft spots and your weaknesses and your biases, which I know we have learned a ton over 18 years doing that by continuously seeking the hard feedback and trying to continually be better—these are things that have enabled us to increase our points of differentiation in the market.

Rudy Scarpa, Pantheon:
It’s such a crowded market. You have to have some differentiated strategy just to cut through all the noise. And you may have to get creative for some short period of time. If you can’t get LPs to commit to a blind pool fund, there’s nothing wrong with, for example, doing a pledge fund, a deal by deal. The economics could be attractive. That’s a great way to start generating relationships with LPs, and then proving the concept, proving that you can execute on the strategy that’s differentiated. There really is a market, they’re starting to build a track record as an organization. Then, raising a fund—it’s a great alternative we’re seeing more and more of that.

Snow: There’s a lot of LPs that will tell a newer firm, “I won’t invest in funds one through three but if you do well, I’ll come back and invest in fund four.” Is there a flaw in that approach?

Conrod: Yes, certainly, there may not be capacity available and you may be missing out on some very high financial returns over a long period of time.

Mullen: For us, we start as a first-time fund, and we’re incredibly grateful to the people who put us in business. They co-invested with us and they backed us on fund two, three and four, so we sincerely appreciate those relationships. They are the critical investors and partners on our firm and, in each fund, we’re happy to add only a handful of investors—we’re not raising a lot of capital. So, if that’s not your objective to max capital and that possibly the cost returns, then we do have the luxury to be more selective and we’re really looking for people who are smart, good investors. They backed us earlier on and they were able to scale with us and support us as we’ve grown modestly over time.

Snow: In firms like yours, are there very large LPs, like pension funds, who show up to a firm with a fund four or fund five and say, “You guys have done great. Here’s $250 million, we’d like to be your next big investor.” That’s not quite feasible, is it?

Mullen: No, it’s neither one. The scenario is not feasible from either side, right? So, we don’t have that much more capacity. Each fund we raise, we raise a bit more. Generally, existing investors have been happy, so they want to increase their allocation. So, there’s a certain number of slots and we try to be as thoughtful as we can with every slot. But, again, our sincere appreciation and loyalty is to our existing investors who backed us early when we most needed them.

Scarpa: I would reiterate that. We’ve had one investor for 30 years and you’re very grateful for those investors that came in early. I would say for any general partner, and for LPs out there that are interested in a particular manager, an LP might have to be a bit less comfortable and invest in a fund earlier than they normally would to get that slot—get in there, because you’re not going to be able to scale up with that GP over time if you don’t get that early slot.

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