First Closes: Today’s fundraising environment places such an enormous premium on first close dollars that GPs are becoming increasingly flexible and creative to garner this early support. In order to understand this phenomenon, Sixpoint examined fundraising trends of private equity funds that have had a final close since 2013 with targets of between $200 million and $1 billion. The results were quite dramatic:
- Of the funds that held a first close of less than 40% of the fund target, only one third then reached their target, whereas of the rest, slightly over 75% reached their target
- Funds that held a first close on less than 40% of their target took an average of two years to complete fundraising, whereas funds that closed on greater than 50% of their target took an average of only 14 months (10 fewer months in market on average).
The upshot is that 40% of the fund target represents a crucial threshold for GPs to meet when targeting a first close from both a timing standpoint and from an overall success rate. The question then becomes:
What are the factors involved in motivating prospective LPs to come into a fund’s first close?
- Strong re-up rate – re-up rates should equal 70% of your prior fund assuming your successor vehicle is 1.5x larger
- Prudent fund size – choosing the right fund size is critical to achieving early momentum, shortening the sale cycle and meeting or exceeding your fund target. When setting your fund size, consider existing LP support, size of opportunity, average equity check/pacing and the size of the team.
- Management fee incentives – more GPs are providing a management fee break of between 25bps and 50bps to first close candidates irrespective of check size (larger investors are frequently receiving even better terms)
- Attractive co-investments – attractive investments are increasingly being used as a way to expedite the diligence process and learn how GPs behave in their deal-making activities
- Secondary opportunities – many firms have raised large pools of capital in the pursuit of attractive secondary opportunities, so LP interests available in legacy funds can catalyze interest around primary commitments earlier in a fundraising process.
As discussed in prior 60 Seconds with Sixpoint entries, fund managers must also put in place a programmatic and measurable IR program that will provide them with the depth and breadth of investor relationships from which to launch a successful fundraise. The transition from investing to fundraising should have the appearance and feel of a seamless and fluid relay race baton exchange and less like trying to start an old car on a cold winter’s morning.
Next on 60 Seconds with Sixpoint: We will discuss LP dynamics as it relates to fundraising. There are four types of LPs you will encounter in fundraising. Know your LP prospects…What are the best ways to address their needs and tendencies?