For PE Fund Managers, Non-Fundraising Periods are Crucial
The time in between private equity fundraising cycles is a crucial period for managers—it is a time when managers should maintain an ongoing dialog with investors. This is important for several reasons. First, conversations with investors are how relationships are built. Second, the knowledge and understanding of investor and industry trends gleaned during these discussions will go a long way when it comes time to develop a strategy and raise funds. Finally, investor commitments do not happen overnight.
In an industry with a long-term investment cycle, relationships between private equity fund managers and investors are critical. Managers looking to raise funds cannot approach a new investor and expect to receive a commitment within a few months. The dialog needs to start much earlier and then develop over time as the manager communicates with the investor without the pressure of selling.
Frequent contact provides an opportunity for a manager to learn about an investor’s background, investment style and philosophy, and current outlook on the market. It is also a chance for a manager to discuss the firm and its background and investment strategy. When private equity funds are fundraising, they must focus on selling their products; they don’t have time to have in-depth, exploratory conversations with organizations to see which ones are potential investors. Rather, in between fundraising efforts is the time for managers to learn about investors and have honest conversations without any expectations of what might come in the future.
Maintaining an ongoing dialog with investors also allows managers to stay on top of what is happening in the market and outside of their current investment universe. By speaking with investors, managers come to understand trends in the market. They learn the types of strategies investors are allocating to, and the qualities of the fund management team or infrastructure that are most important to investors. Fund managers that are in touch with investors know which organizations are most likely to take an interest in their investment strategy.
Investors’ commitments do not come within a few months of the first meeting but after several months—maybe even years—of conversations. Managers that are frequently speaking with investors have contacts and established relationships even without a product to market. When the firm begins to plan its strategy for the next fund, it is ahead of the game because now it is re-connecting with people who already know them as opposed to starting from scratch.