The PE Fund Manager Balancing Act: Sourcing Deals while Raising Fund I

Starting a private equity or venture capital firm is no small feat.

Emerging managers face the daunting task of simultaneously building their business, raising capital, and executing deals.

There’s a lot on a new fund manager’s plate from assembling a team to calculating the right fund size, but without a doubt, the two most time-consuming items on a GP’s to-do list are deal sourcing and fundraising. 

Striking the balance between the two is a tricky tightrope, but Katie Moore, Managing Partner, Fund Investments, Hamilton Lane, and Aditya Fontana-Raina, Managing Director, Stepstone Group shared their thoughts on how to spend your limited time wisely in the early days of your firm.

One piece of advice Katie Moore gives to emerging managers is to treat their management company as a separate business entity. This means thinking about the runway needed to raise the desired fund. Do you need two years? Three years? How much capital is necessary to execute your chosen strategy effectively? These are critical questions to answer as you plan your fundraising efforts.

It's a challenging juggling act that requires careful planning and execution, but there are some strategies for success to win deals while closing your fund. 

Your Greatest Strength is Your Network

It's essential to recognize the sheer amount of work involved in starting your own firm. Many emerging managers find themselves pulled in multiple directions, trying to excel in all areas. However, it's crucial to acknowledge that doing everything well is not possible. 

Since your time is limited, it is best spent on leveraging your current relationships and building new ones. This is easy to do at a small scale, without technology, but fund managers looking to grow their business quickly need to invest in the right tools.

CRMs like DealCloud or Affinity can help you track your communication with both LPs and company executives, ensuring that you are reaching out to the right people on the right cadence.

(Learn more about the right communication strategies for LPs here.)

Striking the Right Balance with Co-investments 

Balancing the need to attract LPs with the risk of overcommitting funds is a delicate dance. Your approach will depend on factors such as fundraising targets, timelines, and the nature of your LP base. 

Striking the right balance requires a blend of art and science. You want to do enough deals to capture LP interest but avoid committing funds so heavily that your deployment period ends prematurely.

Co-investments may be the best way to help get your fund on the right track. Emerging managers often use co-investments as a carrot to entice prospective LPs. Firms like StepStone and Hamilton Lane have shown interest in supporting emerging managers through co-investments. 

Consider co-investments as a way to attract LPs as they provide an opportunity to participate directly in specific deals alongside the fund.

Present to the Right LPs at the Right Time

While it's unlikely that large LPs will come in at the first close for emerging managers, there's a universe of smaller, nimbler LPs that can be more opportunistic. These may include family offices, OCIOs (Outsourced Chief Investment Officers), and other specialized investors. Co-investment opportunities can be particularly useful when attracting these early adopters.

But this doesn’t mean you should ignore larger LPs completely.

To build strong LP relationships, emerging managers must showcase their team's capabilities, even before capital is deployed. LPs want to see that your team is capable of executing the strategy effectively. Providing LPs with a taste of what will be in the new portfolio can help them make informed decisions and build confidence in your firm.

To make the best use of your time and the LPs, do the homework and spend the most face-to-face time with investors who can most likely make an investment or co-investment.

Leveraging Technology

Emerging managers face a unique set of challenges when fundraising and executing deals. Grata’s AI-driven BD platform allows emerging managers to identify potential investments, which in turn helps strengthen their pitches to LPs who want to see differentiation and deal flow. 

There’s a lot on a new fund manager’s plate from assembling a team to calculating the right fund size, but without a doubt, the two most time-consuming items on a GP’s to-do list are deal sourcing and fundraising.

Want to learn more about how Grata can simplify your deal sourcing? Set up a demo today.