Key Ingredients to Raising Funds in a Choppy Market

Posted by | Alok Tayal

Private equity (PE) firms are bracing for a difficult period of raising funds as market volatility hits their own annualized returns and those of their institutional investors. Three of the largest publicly traded PE firms — Blackstone, KKR, and TPG — booked losses for the June quarter.

While PE firms remain excited about deal-making opportunities even in this market (most are beginning to see more reasonable valuations), and believe returns will come back soon, volatile markets will likely create some obstacles for fresh fund inflows.

Fund managers, boutiques, and mid-market PE firms looking to raise funds are typically well-seasoned in securing funding through the process of developing a list of shortlisted LPs and defining their funds’ management process, fee structure, and reporting model. However, in the current economy, this may not be enough. In a volatile market fraught with heightened skepticism, a successful fund-raising strategy will need to also include the following three elements:

A sound investment thesis

A sound thesis should be in sync with the market conditions and supported by market research. In addition, the fund must have a data-driven and well-thought-out response to prospective investors’ fundamental question — “Why should we invest in this fund?”

Through the use of deep dive strategic and market research, the fund should analyze the recession-proof sectors (such as pet care or healthcare), consider new emerging opportunities (such as web3), and identify which firms to track in a specific sector/subsector (such as Plaid in payments). By benchmarking the performance of the companies in the relevant niche sectors and how these opportunities fit their investment objectives, funds can determine the key themes of their investment strategy.

Fuld’s capital raising research teams frequently conduct on behalf of our PE clients, sector and market assessments and SWOT analyses that are driven by facts, data, and a well-thought-out growth valuation model with multiple comparisons. Our assessments include headwinds for the identified sectors, be it geographically, politically, or technologically. Having a good view of the market is crucial to PE firms’ fund raising strategies. Such insightful research becomes the backbone of articulating an investment strategy message and providing a sound and decisive response to the question “Why should we invest in or partner with this fund?”

A differentiated approach

A fund’s differentiation should be articulated in a way that makes the fund stand out and boosts its profile.  Funds must clearly outline why investors should commit capital to their fund, compared to other funds or alternative asset classes that may be available with potentially more established track records, credibility, or security. Sometimes, just the cost of capital is the not decisive factor but also risk tolerance, the structure of the capital provided, industry expertise, and overall alignment with a company’s vision all can play an important role.

PE firms collaborate with research and analyst firms such as Fuld to eloquently and cohesively answer prospective investors’ questions about their funds’ unique differentiators, investment thesis, value drivers, and ways that they satisfy investor expectations and needs.

Active marketing

While a fund’s existing private networks are expected to contribute a large portion of funding requirements, they also must market consistently throughout the life of the fund, and even more so in choppy markets. Communication is key to a transparent and successful partnership with your investors. Through internal or external resources, funds must develop marketing collateral and thought leadership content and leverage the power of social media to build their brand.

Fuld helps our clients develop white-labeled content and newsletters, incorporating a blend of robust data and analysis backed by expert opinion and insights. This generates compelling/impressive content to engage, inform, and influence potential investors that clients wish to reach and retain. Our approach helps ensure that thought leadership stands apart from your competitors and demonstrates your expertise in investment sectors. Thought leadership content helps our clients enhance their brand reputation, build trust, and shorten closing periods, as investors prefer to work with firms with demonstrated expertise.

This type of content can also support and articulate a fund’s investment and capital allocation strategy. For example, typically a fund’s strategy is designed to invest in early/seed-stage start-up companies (venture capital), established growing companies (growth equity), credit financing (venture debt/private credit), other funds (fund of funds), or more strategic buyouts or LBOs. The story in the fund’s executive summary, memorandum, pitch deck, website, social media, and other external communications must hold a consistent message supporting its unique strategy. Powerful content can drive long-term brand value, which helps not only with immediate fund-raising needs but also in raising subsequent rounds. (Tip: Having an updated pitch deck that includes relevant topics during a fund-raising conference helps grab attention and boosts engagement.)

If the PE/VC market overheats, the aftermath results in fierce competition among firms for new high-quality funds. To win the race, past performance may not be enough; funds need to have a COMPETITIVE ADVANTAGE. The advantage of research, qualitative, and quantitative data, and analytics will demonstrate funds’ groundwork, due diligence process, focus, and a clear strategy to operate in their respective markets.

The right preparation is key to funds increasing Confidence and raising Capital.

Author: Alok Tayal | Board Member| Fuld & Company

Tags: Financial Equity and M&A Research, Financial Services, PE, private equity