Mega-funds, which allow limited partners to invest capital in capital with larger and more influential businesses, have increased pressure on nonmega-fund managers who must execute robustly.
Private equity due diligence checklists
. General partners (GPs), who can present their unique and nuanced approach of fundraising – from pricing to clarifying intent – will have an advantage in this environment.
“If your purchase a private-equity fund, you’re placing trust in a company, the process they set out, the network they claim to have, and the track records they have.”
PitchBook Lead Analyst, Fund Strategies and Performance. “Because it is a trust-based enterprise, GPs must meticulously prepare so that when they go on the market, they have figured their entire portfolio. They simply need to get on the ground.
PitchBook’s guide for emerging managers to fundraising
Wiek’s most recent
fundraising guide for emerging managers
The following three categories provide an important roadmap for private equity fundraising.
- Know who and what you are
- Know your customers
- Be prepared
Below is the “P” structure in the report. It includes a set LP considerations for vetting investment opportunity with the checklist as well as key fundraising considerations. Wiek notes there is no “right” way to answer all the questions. The framework instead allows for a bottom to top approach that is informed and guided by the GP’s hopes and objectives in the market.
An integral part of
Private equity fund
The structure and all stages of fundraising is the
Barometer of private equity
. Barometers provide information to GPs regarding variabilities in the private equity environment. Barometers can help fund managers understand variance on quarterly returns so they can adjust their strategy to fit the market.
Private equity fundraising checklist
The PE fundraising checklist provided below is designed to give general partners a roadmap for raising private capital funds. It covers everything including market research, customized pitch decks, and contract negotiations.
Create your unique fund strategy
Do market research in order to discover opportunities and companies already operating within the area
Discover how competitive funds perform within the strategy
|Determine a fundraising goal
You can set a target goal for the fundraising campaign that is based on network and market.
|Search for potential partners
Network with LPs during in-person events and conferences. Respond to open mandats and RFPs.
Do your LP due diligence
|Build pitch decks
Create a pitch tailored to the LP.
|Please complete the due diligence questionnaire
Fill out the Institutional Limited Partners Association – Due Diligence Questionnaire ( DDQ ), which is provided by LP
|Install a virtual Data Room
Give LPs access the private data of your team, strategy, and historical performance details
Commitment to limited partners
This includes side letters.
Send limited partners agreements (LPAs
|Setup banking connections with the LP
Wire money between and to the LPs
Key fundraising considerations
GPs may add an additional element to the checklist to help fund their PE fundraising efforts. They can leverage Wiek’s six key considerations, which include:
At this foundational stage of development, GPs need to implement actions listed in “Define a unique fund strategy section” of the checklist.
As many emerging GPs propose a blind fund-asking investors not to know the makeup of it–LPs consider all aspects GPs’ business plans for running their companies. This includes understanding how the team works and who is responsible for managing the deal. Can one person handle a deal from the beginning or do they have a team of specialists in certain industries? These answers will help you answer questions such as who owns the firm, where, and who controls it.
Asset managers’ viability will be affected.
This phase follows market research. The philosophy step is about understanding the market opportunity addressed by the GP and how they plan for it to be leveraged. To gain the trust of LPs GPs will need to formulate a clear strategy and philosophy for their investment strategy.
During the next step, LPs ask:
- What is the GP’s contribution to society?
- Why is this GP’s favourite market?
- Are they well-positioned for convincing potential portfolio companies that their fund is superior to other sources of capital.
This can be difficult for emerging managers, since pointing to past PE fundraising performance metrics may prove tricky if that track record was poor. Emerging managers should highlight any deals the current team has completed, and refrain from taking credit for deals that have occurred in a completely different system.
For potential investors to trust, GPs need to be honest about past experience and track records. Making past mistakes into lessons is a great way to highlight the need to make improvements in strategy and process.
The GP should have the ability to clearly articulate how they plan on sourcing deals, managing portfolio companies, coinvestors, and mining future opportunities. This includes:
- Profitable exits and deal flow
- The established network of the manager
- Roles for the team
- ESG strategy
This last point has particular importance as the LP community is becoming more interested in the inclusion of an actionable business plan.
. According to PitchBook
Recent ESG Reporting
A rapidly growing number LPs consider investment opportunities. They are focused on ethical, sustainable and responsible investing.
Portfolio construction is closely tied to the due-diligence checklist step. It focuses mostly on how a GP has constructed their private capital fund structure, especially in light of their investment strategy. GPs should do the following:
- The size of the fund
- How the GP plans for diversification
- Positioning relative to competition funds
- What sectors will be financed and what percentage will each sector contribute to the fund?
- How quickly will the fund’s capital be invested
Emerging managers should be aware that LPs have many questions. It is important to not only answer the LPs’ questions about the PE-fund structure, but also the reasons behind it.
Comparable performance data provided by custom
The LP will use industry, mandates and the size of the fund to determine the fund’s market value.
This stage covers the final checklist. The technical phase involves hiring an attorney for a fund document to be created and registering the fund as business with SEC. The GP must determine whether to acquire a 3rd-party.
Private placement agent
Search for potential targets by using an investment database. These agents are also known as third-party marketers. They help investors meet, pitch targets, or are retained for funds that don’t raise every few decades.
Terms and fees
LPAs are limited partners agreements. GPs will need understanding of the economics and variabilities of the 2% annual fee.
The final word on PE fundraising is to get to know yourself
It is important for fund managers to understand that the private equity structures, frameworks as well as their day-to-day experiences can differ depending on the GP’s choice of strategy. The PE fundraising checklist along with the associated considerations are useful tools that support all business types and sizes. Wiek reiterates that these steps are essential in laying the groundwork to raise a private capital fund. They also allow the GP to identify their unique value added and market purpose.