Reflections on Today’s Fundraising Market
Keeping an ear to the market at all times is one of the most important things a GP can do for a future successful fundraise. LP allocations toward the asset class are tricky to predict – they are generally correlated to the broader market conditions but there are subtle idiosyncrasies that factor into their process and timing. In this post I will go over four key features of today’s fundraising market so that it may inform your approach and expectations of the market.
- LP velocity continues to tick up: By now it should come as no surprise to anyone that we are in a strong but crowded market. 2017 had record dollars raised but had the fewest funds closed in the last five years. While the crowded marketplace certainly drives up the competition for GPs raising funds, remember that the pressure is on LPs as well. After all, in these market conditions, it is exceedingly common for LPs to get downsized in a fund or shut out completely. Given these dynamics, LPs are taking pains to move more quickly than ever and be supportive to GPs throughout the process. In fact, according to the Pitchbook PE and VC Fundraising Mid-Year Report, the 2018 median PE fund closing time is 11.5 months – which matches the lowest figures on record from 2006 and 2007 (did your eye involuntarily twitch while reading that? We’ll take a short recess to collect ourselves).
- Lower conversion rates post-onsite: LP velocity ticking up, however, is only one side of the equation. The increase in close velocity is also recalibrating how GPs should look at various milestones in the life of a fundraise. This is most apparent in how LPs approach onsites. In the past we found that LPs would only come onsite if they had a high degree of confidence that they would come into the fund. Onsites were typically one of the final stages in an LPs’ process and signaled to the GP that short of anything drastically negative being uncovered, the onsite almost certainly foreshadowed a commitment to the fund. That outlook has changed today. LPs are getting more comfortable flying out to meet the GP with less conviction and are indeed doing so out of necessity – to keep their options open for allocations. LPs realize that they might get crowded out of a fund and are taking commensurate steps to have their eggs in two or three baskets instead of just one.
- Sophisticated co-investment capabilities: Co-investment has always been an important way to bring down deployment costs for LPs such as fund of funds, who have their own LPs to answer to. While co-investment appetite used to be limited to only a few types of LPs in the past, these days we are seeing an increasing number of LPs develop sophisticated co-investment programs. LPs are able to attract better talent and build large and agile co-investment teams that are able to commit to a particular transaction in as little as four weeks. As a result, GPs should expect many of their LPs to request co-investment sleeves, ROFRs on co-investment opportunities, or a number of other structured solutions that allow them to deploy more capital on a no-fee basis. GPs should approach this in a targeted manner – typically you will need to give some sort of co-investment incentive to first close LPs and LPs of size. Beyond that, co-investment is just one of many levers in negotiations with potential LPs and should be given based on prior relationship with the LP, the demand profile of your fund, etc.
- Battle for mindshare: As I have covered in these pages before, any potential engagement is a battle for mindshare with the LP. LPs have a long and thorough diligence process and require buy-in and interactions with many different members of their team before moving forward with a commitment. In today’s market conditions, that battle for mindshare is becoming fiercer than ever. GPs need to be strategic and creative about how they engage with an LP in order to protect their mindshare at the institution. Gone are the days when a couple of meetings would transition to an onsite and then a commitment – these days GPs need to find multiple avenues of dialogue as well as both formal and informal meetings in order to keep themselves top-of-mind at an LP. Similarly, GPs should take care to be prompt and responsive to any LP request. Avoid delays in returning a DDQ or answering a diligence request at all costs – a day late is a dollar short when it comes to guiding an LP on the path towards a commitment.
To paraphrase the Greek philosopher Heraclitus, change is the only constant in life and this applies to the fundraising market. LPs are constantly adapting their process and timing in order to gain an edge in the market and it is crucial for GPs to anticipate and accommodate them effectively. Hopefully these observations of the market will help you plan your engagement with the market effectively and as always, I welcome outreach if you have questions or comments. 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).
