Failure To Launch
In light of an increasingly competitive fundraising environment and the expanded duration of the fundraising process, many GPs are making an effort to get back in the market sooner than in previous years. GPs are usually restricted from re-entering the market too early with prior fund deployment requirements ranging from 65-75% of committed capital, however some groups are testing the limits of these restrictions by including fees and dollars reserved for add-ons, etc. Consequently, the GP is stuck holding a “first close” on a suboptimal amount and then finds itself in a fundraising conundrum. What does one do at this point? In other words, how do you relaunch a failed fundraise?
LPs are used to funds coming to market too early, so fortunately no GP is setting a precedent in this regard. After a suboptimal launch, it behooves the GP to take ownership of the situation, be honest and transparent about the decisions that led to the false start and, if necessary, deliver a mea culpa. If you originally decided to “go early” and “go it alone”, then at this point you may want to consider seeking outside help. There’s no magic wand that placement agents can wave to make all fundraising mistakes or woes disappear, but a thoughtful reassessment of the situation (including a statistical turndown analysis) should be the first step toward a new strategy and approach. Sixpoint’s keys to a successful relaunch of a fundraise are: (1) Patience; (2) Catalysts; and (3) Messaging.
Momentum and scarcity are critical, so trickling out information to LPs is often counterproductive. It is important to aggregate news and developments into a more impactful update as a package. It’s the difference between the drip of a leaky faucet and a strong drumbeat of positive news. Understanding how LPs perceive the significance of the news being relayed to them is crucial to properly executing this approach.
As we have mentioned in previous editions of 60 Seconds, LPs are inherently incentive-driven. GPs can significantly accelerate their fundraising efforts by seeking out LPs that will be persuaded to hasten their process through fee breaks, co-investments and/or secondaries. It is important to know which LPs these incentives can be meaningful to because limiting unnecessary exposure is critical during a relaunch. GPs should focus their efforts on signing up new deals, exiting matured assets, growing the developing portfolio and addressing any issues at the firm-level (human resources, etc.). New LPs are unmoved by forecasted events – performance or otherwise – because they don’t have the benefit of a long-term relationship with the GP and therefore typically take a “show me” attitude. GPs, who often feel immense pressure during this period, have a tendency to overpromise on these deliverables, and few things are as detrimental to a relaunch as missing targets during this very delicate period.
In today’s market, discussions around investment pacing, portfolio volatility and lack of liquidity are some of the most difficult themes for GPs to navigate. These topics are not to be avoided, rather they require a more offensive approach in which they are tackled head-on. Even some of the most high-quality GPs in the market have experienced one or more of these issues in recent funds. An attitude of avoidance is ineffective. LPs respect GPs that address these issues upfront by being forthcoming with relevant data and discussion rather than forcing LPs to chase and wait. Among the diligence tools available in the placement agent toolkit are a value creation analysis, conservative marks analysis, benchmarking analysis, attribution breakout and discussion of sourcing advantages.
The main takeaway is that GPs can successfully relaunch a “failed” fundraise, but it requires discipline and an acute awareness of how to market to LPs in the aftermath of a fundraising misstep.
Next on 60 Seconds with Sixpoint: “Summer Speakeasies”: A guide to the top local hangouts to check out if you have downtime on the Road Visiting LPs