It’s a broadly favourable environment for managers raising first-time funds these days, given just how hungry investors are for yield and for private market assets.
But that doesn’t mean it’s easy.
Attracting capital for a brand-new strategy is a challenge in itself; deploying it and then exiting deals successfully is another. Doing that while running a business for the first time can be beyond many would-be general partners (GPs) – that is, asset managers.
It helps if a new manager has experienced investors with a track record from a previous firm – that's the preferred route for limited partners (LPs) or investors. But the team still needs to prove it can operate as a standalone business.
All this means that a huge amount of investor due diligence is required. Hence first-time funds take longer to raise than tried-and-tested strategies.
An experienced fund manager can expect to reach a close after nine to 15 months, but that could rise to two years for first-time funds, according to a survey by Probitas Partners released in November last year.
So what are the benefits of working with startup managers, what do seasoned LPs look for before making such allocations, and what advice they would give new GPs?
Giving their views are executives from two well established Hong Kong-based family offices, and the London-based director of private equity funds at the European Bank for Reconstruction and Development, which focuses on emerging markets.
The following excerpts have edited for clarity and brevity.
K.O. Chia, director
For first-time funds, there is a fundamental difference between whether the team is a first-time investment team or an experienced investment team coming from an existing fund house to launch a new strategy.
At Grace Financial, we tend to favour experienced investment teams that are starting up their own fund, assuming that their strategy, track record and investment focus is in line with our investment objectives as a family office.
Another important element is for a GP to have clarity of fund strategy in order to differentiate themselves.
Managing a first-time fund is a tough process and really no different from being an entrepreneur. Therefore it takes more than investment experience to manage and build a fund. It is a learning process, and not all GPs can do it well.
It entails managing deal flow and deals; initially heavy operational work (such as working with lawyers on legal documentation, setting up operational processes); recruiting, managing, building and moulding the team; installing investment check-and-balance processes; managing LP expectations; and fundraising itself (bringing in anchor LPs and negotiating terms with them).
It is common for funds to fail to attract sufficient capital or to perform to expectations, so some have to build a track record to prove their investment capabilities on a deal-by-deal basis. This means doing deals as well as trying to raise capital. Some GPs have enough own capital that they just do that initially.
Anne Fossemalle, director of private equity funds
European Bank for Reconstruction and Development
My advice [to first-time fundraisers] would be to have a very clear idea of what you want to do, of the strategy you want to follow, and why you are the right team to address that strategy.
You should have a very clear presentation of your track record and how that exemplifies what you want to do – or if it doesn’t, then why you think you can bridge the knowledge gap between what you’ve been doing in the past and what you want to do when you raise the fund.
And you should have some pipeline to show that you can source investment opportunities that meet the investment strategy of your fund and the experience of your team.
It’s extremely important for teams to have a strong conviction of what they want to do rather than approach LPs and say ‘oh we’d like to raise a fund – what do you want us to do, what are the boxes we need to tick for you to make a commitment?’ That doesn’t work.
Being very transparent is probably the most important thing when you are raising a fund. You need to have a very hard look at your own proposal and be able to underline the strength you have and if there are some gaps, then how you will address those.
And be ready to have an open conversation with the LPs. Don’t try to hide anything, because that’s the worst thing you can do as a first-time fund.
Fossemalle gave these comments at a webcast hosted by the Emerging Markets Private Equity Association in early May. The event was off-record, but she agreed subsequently to be quoted by AsianInvestor.
Kenny Ho, managing partner
Whilst in general we don’t make a habit of investing in first-time funds, there are situations where we will consider doing so, particularly in areas such as the latest disruptive technologies or fixed assets such as real estate.
In both cases [our focus is less on the strategy behind the] first-time fund [and] more about the expertise and experience of the people that we are investing with.
We very much view the investment into any fund, first time or not, as an investment in a partnership. This partnership is based on our belief in the person’s track record in that particular space.
We will spend an inordinate amount of time on that fund’s risk controls and capabilities in due diligence and structuring.