Fundraising

Fundraising is the process in which a fund raises capital from investors. The fund manager seeks commitments from capital providers, which are later used to buy companies. Only once enough capital has been raised can the fund begin investing.

The process follows a set pattern: strategy, target size, terms and structure are defined and set out in a presentation and a private placement memorandum, existing and new investors are approached, they conduct their diligence on the manager, and subscription follows. Investors examine above all the track record of earlier funds, split between realised and unrealised holdings, the stability and composition of the team, the coherence of the strategy, the sourcing of investment opportunities and the terms including fees, waterfall and the manager's own commitment. The process runs across several closings: investment can begin after the first close, while further investors join until the final close and are equalised through a compensating payment.

A placement agent is often engaged to provide access to institutional investors and manage the process. Raising a first fund is considerably harder, because there is no track record and many institutional investors have internal requirements on the minimum number of prior funds. The ability to raise capital reliably determines a manager's survival, because the management fee carries its running costs.

Preparing the track record is the most laborious part, because investors require a breakdown by individual holding, by value driver and by attribution to individual team members. An aggregated return figure is not enough. The coherence between the strategy claimed and the investments actually made is also examined, since deviations damage credibility. For managers with a limited history, securing experienced anchor investors is often the decisive door-opener. In assessing a manager, alongside track record what matters is how much of their own capital they commit and how stable the team has been across several fund generations.