PE Veterans On Fundraising Basics For First-time Fund Managers

As 2011 came to a close, private equity fundraising looked to be slated for a modest recovery after hitting what many thought to be the cyclical bottom in 2010. However, fundraising is always the last piece to fall in place when the PE cycle enters an upswing. This was evident as new PE fundraising was all but dormant in 2011. It has essentially meant tough survival conditions, especially for first-time funds (either breakouts or spin-offs from already established private equity funds), which constitute a major chunk of India-specific PE funds on road now to raise money.

For these managers, the heightened selectivity of Limited Partners created a bifurcated market. While an elite group of GPs had very successful campaigns, fundraising languished for the majority. So what are the essentials that make one fund manager stand out from the rest?

According to Ajay Relan, a Citigroup veteran who went solo to set up CX Partners in 2009 and raised $500 million for his debut fund, there are essentially three ground rules that one should follow – trust, experience and a differentiated strategy. And this basic set of rules can be employed by any fund manager for achieving similar results. Some of these lessons will sound familiar, though. Some may even appear obvious. However, these are not being rigorously applied by fund managers to get similar results, feels Relan, a panel speaker at the recently concluded VCCircle India Limited Partners Summit, 2012, where he provided insights into one of the most relevant topics of the day – Fund Raising Myth Busters: First Time Funds Not Too Risky.

So what are Ajay Relan’s fundraising guides for starters?

Trust: You need to project yourself as an entity whom they (LPs) can trust. LPs are putting money in a blind pool and they need enough confidence that their money would be safe.

Experience: There is no substitute for experience and the team must have deep and wide experience.

Different Yet Consistent Strategy: The third is, of course, the strategy. What you outline should have two components. For one, you can’t deviate too much from what you have done before as they like to see success being repeated. At the same time, that strategy has to stand out in terms of what others are doing. If it is too much of a ‘me-too’ kind of a game, investors will have to pass the opportunity of investing with us.

“Put this in a mix and throw in a lot of luck, and you might be able to raise a punt,” Relan concluded.

Whom to Choose?

But from a wide universe of investors, who are the ones whom first-time fund managers should approach and focus their energies on? According to Sameer Sain, managing director of Everstone Capital, there are primarily 5-6 buckets for private equity funds to tap the money from – fund of funds, family offices, HNIs (high networth individuals), private pension funds/foundations and endowments. “All of them move at different stages, at different speed and appetite. The fund of funds and family offices are more likely to have a point of view on first-time fund manager,” he added. However, the most difficult place for a first-timer to raise money would be the US-based pension funds but those also, by far, have the largest pool of capital.

Substantiating from his own experience, Sain said, “When we went for our second fund, I had fantastic meetings with pension funds but we were turned down because we could not take $200 million from one investor.”

Sain founded Everstone Capital in 2001, along with his partner Atul Kapur. Interestingly, both were professionals at Goldman Sachs in their previous stints. Sain had spent 11 years at Goldman Sachs where he was MD (investment management division) while Kapur spent a decade at the organisation and was MD – Principal Strategies Group (Goldman Sachs’ proprietary capital) – for three years in Europe. Building a financial services firm from the ground up, the duo has raised close to a billion dollar in assets under management across various funds within a short span of time. Only last year, Everstone Capital Partners II got oversubscribed and closed at $550 million.

Yet not so far from the pension funds, US-based endowments are another type of fund managers whom first-time fund managers should target, feels Sain. But in such cases, the pedigree of the individual becomes very important. “For the more successful Indian fund managers – be it Westbridge in its initial avatar or Ashish Dhawan when he started out his fund – the major source of backing came from the US-based endowment funds. It is a very difficult market to crack but if you have the right kind of pedigree, you can do it. It is also a big stamp of credibility and everything in-between is a bit of potluck in my view,” he asserted.

According to Sain, transparency is extremely important but fund managers, particularly those on road, do not necessarily pay enough attention to it. Often, GPs gauge what investors want to hear and simply start saying those things. Sain has cautioned that this might soon prove to be a futile exercise as LPs change their mind a little too often and what they want to hear and what they like are two different things. “They might like venture in one cycle, growth equity in another and so on. If you take all the investors’ view and aggregate it, you will get a zero.”

However, capital would be available for investors who have ‘long-term greed,’ have the right business model and the right construct for the investment philosophy, he concluded.

Also Read:

60 PE Firms On Road To Raise India Fund: Will LPs Show Them The Money?

First-Time Fund Raisers And Pain Points

VCCircle Survey: 12-13 To Be A Good Vintage Year For PE/VC Funds

Limited Partners Have A Long Memory, LPs Warn Indian GPs