ultimately, institutional capital will find the right people with the right product at the right time. In the interim, however, it is often challenging for new fund managers to develop the proper track record and infrastructure to become institutionally accepted. As a result, the fundraising process becomes difficult and time-consuming, particularly when managers approach the institutional community prematurely. There are many ways to approach the limited partner community, and this article is not meant to be all- encompassing. What follows is advice that should lead investment teams in the right direction toward building their business while generating attractive returns for their investors. The first step is to identify where the manager is in the life cycle of a private- equity fund. Broadly speaking, the four categories of funds are as follows: denoted as Fund II, Fund III, etc. 4. Platforms are well-established investment organizations that have been institutionally accepted. They typically have in excess of $1 billion under management. These firms are well-branded and are not subjects of this article. Pledge Funds Being realistic about where a manager falls among these categories will save veryone a lot of time. It is not unusual to meet teams that clearly fall within the pledge fund category but are focused on forming Fund I. Because they approach the limited partner community prematurely, they spend the better part of a year fundraising, usually with little success. A select few succeed in raising money, but they tend to be exceptions. Those that are successful tend to be spin-outs from platforms, ideally backed by a financial commitment from their employer.
limited partner if the co-investments perform well. Alternatively, platforms are well-positioned to introduce pledge funds to their institutional clients. The endorsement of a well- established organization that has trong limited partner connections makes the fundraising process considerably more efficient. BY RAFAEL ASTRUC, MANAGING DIRECTOR, GARRISON INVESTMENT GROUP
Managing to Succeed:
Building a Successful
In any case, the result is that the general
partner can spend 80 percent of his time
on investing and much less time on
fundraising. Regardless of the financial
partner, the larger point is that the
investment team can then focus its time
on developing its track record rather than
spending most of a year fundraising.
1. Pledge funds are characterized by
teams with limited experience, if any,
working together to execute their
investment strategy. They often finance
transactions on a deal by deal basis.
2. A “Fund I” fund, generally speaking,
is a pledge fund that has successfully
completed three to five deals while
investing $30 million to $50 million.
The underlying fundamentals of the
portfolio companies should show
significant improvement, such that
they have material unrealized value.
Ideally, a pledge fund would have
experienced at least one or two
realizations to move into this category.
3. Established funds are those in which
the senior partners have worked
together as a team for a number of
years, successfully executing on their
strategies. Such funds typically are
How does a manager know he
is ready to form a Fund I?
Institutional investors seek an
team that has
should be clearly
is and how the
If a manager lacks a track record
to form a Fund I, creating a
pledge fund has significant
advantages. The manager
generally loses some
discretion but partners
with a group or groups to
finance investments on
a transaction by transaction basis.
Likely financial partners include
family offices, funds of funds,
and private-equity funds and/or
platforms. Each of these potential
partners may provide different
levels of value beyond capital.
For example, a family office may
provide a manager with more
control, while a
fund of funds
may be a natural
that have little