January 28, 2014
Interviewed by: David Snow
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Fundraising in the Shadow of the Financial Crisis

Three PE fundraising experts discuss how they raise funds in the post-financial crisis era. With Gene Wolfson, Partner Investor Relations & Business Development at Catalyst Investors; Adam Blumenthal, Co-founder and Managing Partner at Blue Wolf Capital Partners; and Mounir Guen, CEO of MVision.

Three PE fundraising experts discuss how they raise funds in the post-financial crisis era. With Gene Wolfson, Partner Investor Relations & Business Development at Catalyst Investors; Adam Blumenthal, Co-founder and Managing Partner at Blue Wolf Capital Partners; and Mounir Guen, CEO of MVision.

From the Road: Fundraising in the Shadow of the Financial Crisis

The New Normal for Fundraising

David Snow, Privcap:

Today, we are joined by Gene Wolfson of Catalyst Investors, Adam Blumenthal from Blue Wolf Capital Partners and Mounir Guen from MVision. Gentlemen, welcome to Privcap today. Thanks for being here.

Adam Blumenthal, Blue Wolf Capital Partners:

Thank you, David.

Gene Wolfson, Catalyst Investors:

Thank you.

Snow: All of you are fundraising experts and the two GPs at the table have actually recently been through very interesting and informative fundraising successes of their own and I’d love to hear your stories.

We’re going to be talking about the realities of fundraising right down to the nitty-gritty of how you get it done, how much time is involved and the resources and money issues. Why don’t we first start with hearing the stories of your most recent fundraisings, how they went, what you learned. Starting with Gene from Catalyst.

Wolfson: We closed our last fund in 2012. You can imagine, we were fundraising post-financial crisis and I think there are a lot of great stories out there and there are a lot of sad stories out there of folks who were trying to raise funds during that period of time. For everyone with maybe the very few exceptions, the time it took for them to get their fund raised was much longer than they had anticipated, even understanding that they were in a post-crisis world. 

You were facing the denominator effect because the public markets had gotten to points where they thought they had a 13 percent allocation to private equity and they now had a 20 percent allocation or 22 percent allocation. LPs were scrambling to rebalance their allocations. 

Our personal experience was that it took longer than we had hoped it would take but we came out the other end with a successful fundraise. We basically doubled our fund size from the previous fund and came out with some fabulous new LPs, which was out of necessity because a lot of our LPs were financial institutions in our previous funds and with Dodd-Frank looming and the Volcker Rule, those folks just weren’t re-upping. That’s nothing to do with performance, it’s just that they were not going to put any more capital out to private equity and they were scaling back those efforts.  

It was a tough fundraise and I think I learned a lot from it. I think most importantly, I learned that you want to have a diversified group of LPs for situations like those crises where you don’t anticipate that a whole group of your investors may not be able to come back and also always anticipate a tougher environment than you actually could – don’t be so optimistic that you think you’re going to get it done in a hurry. Plan for a longer period of time. 

Snow: We’re going to have some follow-up questions for you, Gene and I’m sure Moose will as well. Adam, your story of your most recent fundraise, how it went, what was unexpected and what you learned?

Blumenthal: We really, in a formal sense, started fundraising in October of 2012 and had a final close in July of 2013, so quite recent. It was about ten months end to end, a little less. For us, we think that was a good time frame and actually that was a little faster than we had anticipated getting to the end because our LP base as well which predated 2008 from the prior fund had gone through its own series of restructuring.  Our earlier LP base largely was out of the market and so these were essentially new relationships. 

Snow: The former LPs, they were deciding against your firm not for performance reasons.  

Blumenthal: We had extraordinarily good performance but virtually, many of our LPs had simply stopped investing in private equity entirely and the few that still were had radically shifted their strategy. We’re a middle market fund. They had moved away from that. We were faced with an LP base I’d say two-thirds of which were simply out of the market and a third of which simply had radically articulated a different strategy in 2013 than had been appropriate for them in 2008 when they had thought about it the last time. 

We had known years in advance that this would be the case. It’s not like this was a surprise for us. We had begun laying the groundwork really years in advance. We started fundraising in October but our view was that we had begun building relationships years in advance because when an LP is investing in a middle market fund, you’re not buying anything, right? There are no assets there. You’re making a commitment to a team and a strategy and you have lots of choices, right?  You’re out there.  Lots of people are out there.  Lots of teams, lots of strategies and all of us look relatively similar in some sense.  

We had started years earlier creating those relationships, inviting people to our annual meetings, visiting them and describing what it was we did and telling our story. We’re fortunate that we’re a special situations fund. We deal with very complex situations so our stories frequently are unconventional and entertaining and people are interested in listening to them but we built on that and so by the time October of 2012 came around, we had been telling the story to a lot of individuals and had a lot of individuals who felt they knew us and were prepared for us.  I think that made our life a lot easier.

The biggest surprise for us as we went through the process was that despite having done that – for some people we had built the relationships and it moved through a process and they were happily there, enthusiastically there on our first close. There certainly were institutions where despite everything we thought we had done, as we moved through a formal process and moved through various levels of multi-level bureaucratic organizations, people that we thought were good friends turned out not at the right decision-making level. Fortunately, other people who we didn’t know at all jumped in early and grew enthusiastic. It all sort of offset each other.  Our prediction about exactly who came in early would have been pretty wrong. 

Snow: Moose, any questions or comments for our battle-hardened GPs?

Mounir Guen, MVision:

It’s nice to hear them because what they’re reflecting with the community is an experience that is absolutely on the mark. Let’s just step back. You (points at Gene Wolfson) were at a time where bricks and emerging market was still a bit more popular. You (points at Adam Blumenthal) were at time when they were not popular but the U.S. was hyper popular. When I look at investors today and they’re telling me that they’re processing six funds, it’s probably five to six U.S. funds that they’re processing, believe it or not, regardless of the nationality of who I’m speaking to.

The U.S. is very much in focus. So you were in a good place and you were just at the edge there. What one is looking at is when one looks at an ability to understand what the potential marketing plan is and you have three plans. One is the normal, which is normally a nine to 12 month. You’re completely on the mark.

The thing that I appreciated in both cases was that they appreciated getting to the mark because what I normally tell and what I advise to general partners is put your watch away and fixate on your business and what your business needs are. If you have a target that you’re working to, you work to the target regardless of which path you have. You can’t sit there and look at your peers or somebody that you consider to be a competition or competitor and say, “Ah, he did it in three months and why am I like in nine?” It doesn’t matter. What matters is that you got to your marker and you’re able to move and develop your business the way you want to because you are at your targets, you’ve been successful. 

The path of the success is an interesting point that both gentlemen raised and the fact that to be very honest with you and I wrote about this a year ago, you have to begin a year before. A year before, it’s a question of understanding who you are, what your messages are, what your valuation policy is, what your portfolio looks like, what your pipeline looks like, what your resources look like?  You can’t all of a sudden say, “Uh-oh, I’m at the end of my investment” or “It’s fully invested, time to go to market!” 

Let’s just find somebody that hashes together or let’s put ourselves together and see what happens, right? This is not your 100-day business plan when you make an acquisition or an investment.  You need to use the same type of approach when looking at marketing.  

It’s an interesting point that you raised because in both of your cases you had a fair amount of mortality and melt. Mortality is the headcount and melt is the amount of dollars that would come back.  On average, today’s funds have a melt of about 50 percent and regardless of popularity because of the constitution of the investors that they had in the past. It’s structural, you see? Will that change with time? I don’t know. When I did this ten years ago, the melt was like ten percent, right?  That’s why everybody was able to double and triple in size. Because your existings would be at least one to one and half times your prior fund size and then your new would double that and then boom, you got yourself your new business.

When you look at today and you look at that type of impact, the problem that you have within that which neither one of them mentioned which I thought was interesting was the challenge of the first close because a lot of investors show interest the moment they know you’re real. The ability to drive to the first close becomes an absolutely crucial element of that plan. 

I’d like to hear a little bit about some of the thoughts that you had about fixating that first close and then generating that momentum around it.  

Wolfson: Well, my son will be happy to hear this analogy.  We call the effect that you said “hanging around the hoop.”

Guen: Yeah.  

Wolfson: Everybody wants to hang around the hoop and my days in public securities markets are no different than an IPO. They want to be the last trade. They want to be the closing ten percent of the IPO. They want to be the last. Everybody wants to be the last ticket. Nobody wants to be the first ticket. The first ticket is obviously much more difficult. I know other fund managers get there in different ways, right? Some people offer incentives for people that are willing to be in a first close. We did not offer incentives and maybe had we done that, we might have gotten to our first anchor investor earlier but we’re a small fund. Our fund size is 215 million. We need our management fees. We need our carry to keep the partners engaged and earning a reasonably healthy living.  

We took a look at what our model was and we just really didn’t think that was the right move. Then we thought if we find other large investors later, everybody’s going to want that same deal. We immediately said that we were not going to do that. That made it even a little bit more difficult because what we were offering people as an incentive was us.  

We just stuck to our story that our track record is a great track record. We’re not changing our strategy. While we’re going to double our fund size it’s still well within the check sizes that we need to write to have our competitive advantage as far as deal sourcing is concerned.  Sticking to that story took a little longer but at the end of the day it worked and we did find our anchor investor.  

As you would expect, as soon as that anchor investor committed, the sea parted and things got a little bit easier for us with the follow-up funds. I don’t have a magic formula to how you find that anchor investor. For me, it was just persistence. Not the persistence of continuing to perform well but just keep knocking on doors and keep telling your story, which is why you have your story told.  

The last thing I’ll say, you mentioned that it’s a year before fundraisers when you should start thinking about fundraise. After this experience, I’ve come to the determination that you’re always fundraising. That when you’re not asking people for checks it doesn’t mean you’re not fundraising. You’re brand building and to me that’s the same thing. 

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