India is an entrepreneurial country. So, it is not surprising that the number private equity professionals in India spinning out or thinking of spinning out from their respective firms to start a new PE outfit is also ever increasing these days. They don’t seem to be deterred by the tough fundraising environment for PE globally, bad headlines about India, time taken by some of their predecessors to raise their first fund etc. etc…. I am happy as an LP to see this.
On the same time, from various conversations with many of these professionals over years, I figured that almost all of them are at some stage of finding out what is the best approach to raise a first time fund. Questions include:
– How to present my track record?
– Is having an anchor investor a must?
– What should be the team composition?
– Who are the LPs I should target…..
The list is long.
While there is no hard and fast rule and a perfect answer to any of these questions, sitting in the other side of the table, I see there are definitely some better practices to follow than others. Needless to mention, this is not meant to be an exhaustive list, but only some prominent thoughts.
Team and track record
Relevant track record and team – these two were always so much important and even more important for LPs these days when they are getting very very selective on whom to back. Be aware that you are pitching for the same dollar which can be allocated to a PE team which maybe sitting in China, SE Asia, Australia etc. So the onus is on the GP to prove that they have a team which has worked together and made good returns before. The market is no longer in 2006 or 2007 when LPs were investing on resumes. There are many teams across Asia which made good returns with no or very less turnover over last 6-7 years (despite the GFC). So if you don’t have a team which made good returns and stuck together in the process of doing that (and obviously willing to spin out together as a team), the chances of finding LPs to back you reduces significantly.
Strategy and differentiation
Clearly identify a strategy which can use your team’s differentiated strength. Then make sure that you define your strategy, deal making style, strengths of the team which ties in to execution of the strategy etc. very clearly, in a way differentiated from other major players in the market. If you come out and say that we are just another growth capital fund from India, chances are that you will be considered less credible by LPs. But you should also be mindful of not making yourself super niche or being seen as executing a strategy which is extremely tough to execute in a tough fundraising market. Both these will make fundraising very hard and rule out most of the potential LPs investing in India. This is a tricky area where I see many GPs struggle.
Anchor or no anchor?
Given the current fundraising environment, it is always better to have one or few anchors, at-least informally tied in before going out to raise funds. This has two benefits: a) Gives more assurance the new LPs of a potential sizable first close which will put the GP into business b) An assurance to LPs who don’t know you well that other people who know you well trust in your ability to make returns in the current market and thus it is worth spending time looking at your fund very seriously. Many of the fast fundraisings of spin-out teams in Asia and elsewhere happened because they had the cornerstone LPs tied in, at least informally, before they went out to the market officially. After all, the heard mentality of LPs is well known (and infamous!).
The minimum fund size question
Always have a minimum fund size in mind with which you can sustain your business for a few years before you are out for your next fund. It maybe useful if you approach PE fundraising like a bootstrapping entrepreneur, at least in the current market. You should be ready to take a significant cut to your salaries and bonuses, and in some cases, should be willing to even go without it in the worst case, if you are passionate about developing your own private equity franchise. It is no different from building any other business.
Importance of a good investor relations guy
You need a right person to tell your story well to LPs. It can be a person with the skill-sets, maturity and networks inside the team or you will have to hire a good agent. I come across many great investment professionals who just cannot make a great pitch to potential LPs, just because they don’t have great selling skills. Tough times like this make it even more important to ensure that your fund’s story is told crisply, consistently and professionally to the LPs in a targeted manner. Mere ‘carpet bombing’ will not work!
A balanced Pitchbook
A balanced pitchbook is a key fundraising tool in challenging fundraising environments. One thing which many GP pitchbooks lack is adequate reference to challenges in the market they operate in and clear upfront details of how they as a GP will be able to tackle those problems. I understand the GPs interest in playing up the opportunities in the market and playing down the risks. But the truth is, it is the risks which are looming large in the mind of LPs these days, especially with all the doubts in their minds about India PE, and if you are not able to tackle that problem upfront, it will be tough to gain their confidence. If the LP is not convinced about the India story to begin with, now is probably the worst time to try and convince him anyway by saying only the good things about the market!
Related aspect is the importance of focusing on your bad investments along with the good ones in your pitchbook. Not even 10% of the pitchbooks I see will have a case study on the worst / a bad investment of the GP. It is always a best practice to lay down the places where you have stumbled and tell LPs that this is what we learnt from it and will do differently going forward, rather than LPs prodding you to bring that out, leaving a feeling that you are defensive about what you did not do well. As an LP, I will be worried in backing a GP who claims that I have not made mistakes.
Finally, and most importantly, tell the LP what you truly believe about the market and opportunities, not what the LP what to hear. It is always great to hear a real passionate and honest pitch from a GP, than a well tailored one which is intended to check all the boxes. Over the years, we have always seen these passionate true believers going ahead and building the best PE franchises in the world. Good LPs understand this difference and there are enough people out there to back teams who believe in what they do and have the capability to execute it.
(Anand RP is the Investment Director, Squadron Capital. The views expressed in this article are those of the author and do not necessarily reflect the views of Squadron Capital.)