Did Your First Close Fall Short? Here’s What You Can Do
A show of support from your existing LPs for a large first close is certainly the ideal way to kickstart a fundraise and race through the remainder of your process. As a general rule, we have found that the quickest raises have secured a first close of roughly 50% of their fund target. This heuristic begs the question, however – what is a GP to do if they don’t have a strong first close? Are your chances of raising capital doomed if you aren’t able to corral enough support from your existing LPs?
The short answer is no. There are a number of reasons why existing LPs may pass or drag their feet on committing to your next fund, and GPs are often surprised when very supportive LPs show concerns around a future re-up. The key to bouncing back from such a situation is to carefully understand your LPs’ concerns, which typically fall into two baskets – fund performance and fund deployment.
The best piece of advice I can give you when faced with the prospect of a weaker first close is to take some time away from the market and focus on deals. GPs rarely like to hear this but under the right circumstances it can be a critical factor for success. Ideally, GPs will not have gone out too broadly in the market at this stage and can dial back engagement with new LPs. Finding new investment opportunities will allow you to further deploy your existing fund or, if you are out of capital, can be used to offer co-investment to LPs which can be a catalyst to a fund commitment. LPs will find it much easier to justify re-up commitments if you already have a deal (or more…) in the ground for the new fund and are actively sourcing new opportunities. Another point that is often overlooked by GPs is letting the existing portfolio mature. In addition to finding new deals, take a look at your portfolio and determine whether there are any upcoming exits that will provide liquidity to your LPs. A steady increase in marks over two or three quarters will also give existing LPs comfort around the fact that the portfolio is moving in the right direction.
Messaging is an important part of revamping a fundraise. Don’t be afraid to reposition the story to existing LPs to address their concerns. It may require a relook at how you add value or simply discuss enthusiasm about the current portfolio or market opportunity. Keep them updated about additions to the senior team, modifications to the strategy based on previous lessons learned, and any other substantial changes to the profile of your firm. As tempting as it may be, refrain from going back to LPs with the same “non-updates”, even if that means having some nervous months where you are not certain whether they will come back or not. Speaking from a position of strength is crucial to turning a “maybe” into a “yes”. Don’t force the “no.”
Having a lack of re-up support from existing LPs may seem like the kiss of death for a private equity firm. There are, however, steps that you can take to bounce back and have a strong fundraise nevertheless. Have a great weekend!
Sixpoint Partners, LLC, is a registered broker/dealer, member FINRA (http://www.finra.org) and SIPC (http://www.sipc.org). Sixpoint Partners Asia Limited is licensed by the Securities and Futures Commission (http://www.sfc.hk).
