Insights and Best Practices: Achieving a Successful Close in The Middle Innings of A Raise
In my last issue of 60 Seconds, we explored why some funds get raised more quickly than others. Ultimately, fundraising success is a function of strong performance, a strong team, and a strong market: if all three bars line up the money comes out. In the current environment, however, the fundraising slot machine may be broken. The markets are clearly liquid, and yet some managers with otherwise strong performance are struggling out of the gate. What is driving this slowdown? It’s a “show me” market. The bifurcated nature of the market today favors GPs who can demonstrate not just strong underlying numbers, but actual DPI while delivering on the other key catalysts for success. If you are one of the funds whose fundraising process is taking longer than expected, it’s important to recognize that a fundraise is really a series of individual fundraises inside of a larger fundraise. Realize that your messaging, momentum drivers, and even team presenters/approach may all vary depending on where you are in the calendar and current commitment. LPs will give greater (or lesser) weight to the “6 Catalysts”: new investments, exits, fundraising progress, an improvement in marks, co-investments, and where applicable — fee breaks, depending on the stage of your raise. Let’s consider three specific stages of the fundraising cycle and the actions you might consider taking to engage with LPs during each.
First Close Dynamics
Raising the first third of capital for any new fund or the first half for any established fund is always the most difficult. As you consider how to stand up your next vehicle, I recommend you go through a strategic bridge-building exercise. In reality, it won’t be possible to map out the entire fundraise perfectly. Still, significant early planning can help facilitate not only the success of your first close but can also reap substantial benefits by planting seeds upfront with LPs that can follow in subsequent or final closes. Take the time to ask your Advisor to evaluate which LPs are appropriate targets for the first close. Base this analysis on past behavior, prior connectivity, capital availability, and – most importantly, alignment between the LP’s hot buttons relative to your existing fund profile. If an LP is highly focused on DPI and you don’t expect to have any exits for a few more quarters, such LP is either an inappropriate target for the first close or your messaging needs to be more delicately tailored to them. The same can be said for other dynamics related to marks and assets that you expect will show better over time. If pacing was a problem in your last vehicle and you expect to make several new investments soon, query when would be the optimal time to visit with LPs who are hyper-focused on this topic. Remember, at the beginning LPs are looking for a “reason to act” and at the very moment, when you have significant excess capacity, it all comes down to lining up catalysts. Finally, don’t feel like you have to go wide at the onset. Many GPs have an urge to meet as many LPs as they can early on to achieve a quick fundraise; however, this will actually have the opposite effect. You should try to reach out to no more than 30-40 LPs (maximum) pre-first close.
Fundraising Across Middle Earth: The Search for a Second Close
Good news! If you’ve made it this far you are through the most difficult period in your fundraise, or at least that’s what you are probably thinking. While the first third is certainly the most difficult, the next third is the second most difficult pool of capital to close. The biggest mistake many Agents (and GPs) make is sticking to their original pitch. After a while, throwing the same fast ball down the middle will allow someone to hit it out of the park. You have to make some tactical pivots in your outreach strategy, messaging, and approach. In other words: try a different pitch. By now, you have probably closed some of your existings through the re-up process and a few new LPs who were early movers and joined the first close. At the same time, you also planted many seeds through the initial outreach effort. It’s critical that you re-categorize each of these LPs and gain a deep understanding of what they telegraphed to you as their pain points for moving forward. That way, you can both address them in a follow-up meeting and determine when is the right time to have that follow-up meeting.
Finally, this is the critical moment to layer in the next 100-150 LPs into the process and segment them according to a variety of outreach categories. The new LPs should be intrigued by the fresh dialogue and status of your raise rather than feeling fatigued; the “early look” LPs should feel excited by your momentum and execution. Take the time to identify one or more of the remaining 6 catalysts and focus LPs on the most achievable set of milestones from the list. Perhaps you’re about to hit a major exit. Perhaps your company marks are going to rise materially due to strong performance, or perhaps you are now open to providing a modest fee break or unique co-invest structure besides the staid side-letter. From a message management perspective, if you do continue to struggle, consider lowering your target to create scarcity, and work with your Agent to craft the appropriate message. Too often, GPs see this as a sign of weakness, when in fact it can be positioned as a point of strength. It’s this last catalyst (scarcity) that is the most important of all and now the ability to create it is fully in your hands.
Light at the End of the Tunnel: The Final Close!
Once you’ve reached the last $50 to $100 million of capacity left in your fund…the end is truly near. That amount by any measure allows you to truly enter the “realm of scarcity” as judged by most LPs. You’ll see the “late close” LPs, driven by j-curve minimization and visibility into your new portfolio, finally activate their work. In this final phase, you can fully capitalize on the buzz generated throughout your raise and establish a final close date. Another common mistake is that sponsors fail to give sufficient thought to the timing around each closing, how to set the closing date, and how to message the same to LPs. While you want to set a final closing date, you have to be flexible if you don’t think there’s absolute certainty that you will hit it. Typically, we recommend picking a final closing date but also establishing a few identifiable exceptions that will allow certain LPs to extend so that they don’t put their pencils down. Critical in all this, of course, is to provide the flexibility to some investors without angering the LPs who hurried up to make the close – only to wait. Your Advisor should work with you on this messaging. If you are in the fortunate position of having over-subscription by the final close, it’s here that you can be selective about accepting the ‘right kinds of LPs’. Although there is no magic formula or scientific equation, visualizing your target as a series of ‘mini raises’ will breakdown a process that many GPs find daunting. If you’re feeling stuck in a middle-raise rut, please feel free to reach out for counsel or join us at a future Sixpoint Symposium (more information to follow).