Fundraising: First impressions

The meeting irretrievably broke down within 20 minutes when the LP fell asleep. Sitting opposite the quietly snoozing investor, the fund manager and placement agent considered their options. Then the manager got up, walked over to the refrigerator, retrieved a beverage, and returned to his seat - completing each phase of the activity as loudly as possible. It had the desired effect and the LP was roused, but there was little point in continuing. The agent indicated to the client it was time to wrap up.

Tales of fundraising pitches gone wrong are legion, but in order to protect the modesty of all concerned they tend to be related on condition of anonymity. Rambling, rudeness, aggression, arrogance, incoherence, miscalculation of the target audience; all of these have emerged at various times, making a meeting lodge in the memory. Arguably just as bad is being forgotten within hours of leaving the room.

No one disputes that condensing an investment narrative into a 45-minute slot, followed by a 15-minute question and answer session, is challenging. Strong returns make a GP stand out from the crowd, but in a group of near equals, so too can a good first impression.

"We look at maybe 600 opportunities a year across primaries, secondaries and co-invest and the number of those we go with is in the single digits," says Doug Coulter, partner at LGT Capital Partners. "So the purpose of that first meeting is to get a second meeting - and that means capturing someone's interest."

For many Asian GPs it is perhaps more examining than ever before. Investors are cutting back on their GP relationships globally and Asia-based managers can no longer rely on a free pass because they operate in a relatively high-growth market.

The implications stretch beyond the introductory meeting. Some LPs claim they have always interviewed intensely, bringing in everyone from senior management to junior analysts; others are coming around to the idea. What it means is that GPs must field questions at multiple levels during fundraising and then plenty of follow-ups throughout the life of the fund.

"LPs may have gotten caught up in the height of the Asian market. Overall, investors continue to support Asian private equity but they are becoming more selective in terms of the number of sponsors they are willing to support. If an LP is not funding new GPs and solely focused on extending existing relationships, it may dedicate more time to execute a robust and thorough due diligence process," says Jonathan English, managing director at Portfolio Advisors.

Grueling groundwork

Provided a GP is comfortable getting into granular detail on strategy and investments, the longer due diligence calls are an intellectual rather than a presentational slog. But striking the right balance in an introductory meeting might be a stretch for a manager more accustomed to sourcing deals than investor relations. Internal specialists or third-party placement agents can help bridge the gap.

A placement agent's work begins before a mandate is awarded. Preparatory calls are held with team members, senior and junior, and background research is conducted into everything from the internal dynamics of the firm to the views of portfolio company CEOs. In the case of some of the larger agents, a GP will be put through several rounds of interviews with sales team members who pose questions based on their own experiences dealing with LPs.

The next stage is constructing a narrative. This is underpinned by explanation and analysis in the private placement memorandum and behind that lies the data room, part of a communications strategy intended to ensure accessibility and transparency. To get an LP to the due diligence phase at which they fully engage with this information, it is necessary to whet their appetite through the introductory meeting and accompanying pitch book.

"As a starting point, you listen to the way a GP naturally pitches and you break it down into what does and doesn't work," says Vincent Ng, partner at placement agent Atlantic Pacific Capital. "We have to understand the full story of the fund, the key points we want to put across, and the individual's strengths and weaknesses when it comes to pitching."

Some errors come down to a misuse of the 45 minutes a manager has in front of an LP. Too much time might be spent on a broad introduction to the fund's target geography or giving biographical information on the firm and team members, perhaps leaving only 10-15 minutes to explain how the investment strategy has been executed in the past and what this means for execution in the future. Going to the other extreme, GPs have been known to go into specific details on an individual deal or opportunity that, while interesting, is not suited to the context of an introductory meeting.

An important caveat is that investor sophistication varies markedly. An LP that has been investing in China for 10 years is likely to skim over formalities about the country's economic health; an LP with no exposure to Asia whatsoever might want to dwell longer on the basics.

Another turn-off is basic inaccuracy. This may be a senior partner who is unable to answer questions on existing portfolio companies or a pitch book littered with grammatical errors, factual mistakes and inconsistencies. "If the pitch book is full of issues what does it say about their attention to detail and their investment models? It doesn't mean they can't do good deals but it does raise some fundamental questions about quality control," says LGT's Coulter.

Even worse, there have been situations in which managers have openly contradicted one another - let alone the material in their pitch book - during a meeting.

These problems can be addressed through detail and discipline. Mixing and matching the senior representatives from a fund who handle the meetings can also help overcome obstacles such as a lack of energy when presenting, limited language ability and personality clashes. (A partner who tries to lighten proceedings by cracking jokes might not be a good fit for a serious-minded LP with an interest in value creation; better to pair another partner with someone from the operations side.)

Then there is practice, lots of it. Every GP AVCJ spoke to has been through mock interviews with an investor relations executive or placement agent playing the role of the LP. In some cases these exchanges will be filmed and reviewed. Coaching from an external presentation and negotiation specialist might be required to iron out bad public speaking habits.

However, one can only go so far. It is not unknown for pitch to come across as too slick or polished, which can have the opposite effect on the LP.

"We can't say, ‘These are the questions that are going to be asked and these are the answers you must give,'" says Javad Movsoumov, executive director in UBS' Asia Pacific private funds group. "At the end of the day, the truth will come out. We help them deliver the story in a concise manner and help them understand what LPs are trying to get out of the exercise, without training them to say what LPs want to hear."

In short, a placement agent assists in the communication of an investment narrative but trying to change it may do more harm than good. A bad presenter with a good story can be helped; a good presenter with a bad story cannot. One issue this highlights is the blurred line between changes in style and changes in substance.

A GP interested in minimizing costs might take a fund into market independently that represents a significant strategy shift on its predecessor. For example, a single-country GP might attempt to morph into a pan-Asian player with a Southeast Asia component and budget allocated to recruit a senior managing director to handle China investments. The market response is poor so the GP hires a placement agent and the fund is rebranded.

English of Portfolio Advisors says he has heard managers of first-time and reconstituted spin-outs passionately describe their proposed team and strategy during the initial launch only to return with a markedly different concept after receiving guidance from an agent. "These types of situations test ones trust and it's the LPs role to decipher substance over form," he says.

Special chemistry

Opinion is divided as to how many meetings a GP should actually do. Mounir Guen, CEO of MVision, advocates canvassing existing LPs and also doing meetings with prospective investors to test the narrative. When fundraising begins in earnest, however, targets must be carefully identified.

"If you can raise a fund with less than 100 LPs who are well-profiled, you don't want to go out and meet 300 investors and get 200 rejections," Guen says. "Many questions have been addressed before the meeting, and the GP will struggle to get their head around why it is not moving. It is important we do not overload the GP who needs to focus on their business. We want to find out where the accessible capital is and put the manager into a rhythm so that every meeting he goes into there is more than a 50% probability of success."

Others disagree, although ultimately it depends on how established a GP is. Brahmal Vasudevan set up India- and Southeast Asia-focused GP Creador in 2010 and has now raised two funds. He estimates this has involved meeting 500 different investors and closing about 50 of them. "Nine out of 10 times you know you aren't going to convince them for whatever reason. That's the hard part: remaining positive in the face of a high rejection rate."

This 10% hit rate is cited by other managers, one of whom adds that he limits the concentration of meetings, if not the overall number. His preference is to do no more than four meetings a day. This is done in the interests of personal sanity and keeping the pitch reasonably fresh rather than just going through the motions.

It helps to be a people person. Those who have worked as investment bankers and management consultants in a former career are also potentially at an advantage. It is an open debate as to whether such individuals make for effective private equity investors, but they have made a living out of pitching for business in a competitive environment and learned to deal with victory and defeat.

It is therefore no coincidence that institutions such as Goldman Sachs, Harvard Business School and Bain & Company feature on the resumes of many Asian GPs. "They are physically very presentable so they have a strong presence in the room; they are very eloquent on their strategic focus, expressing themselves through powerful clear vocabulary; and they listen carefully to what the other person is trying to ask," says MVision's Guen. "And this is across the board of nationality."

They are also known quantities, perhaps even fellow alumni of the LP sitting on the other side of the table. This can be a particularly strong currency in markets where there is little apart from reputation to go on. An interesting example of this is Ashish Dhawan, who co-founded ChrysCapital Partners when Indian private equity was still in its nascent stages.

Speaking to AVCJ in 2011, just before he stepped back from the firm, Dhawan identified signing up the Harvard endowment as an anchor investor as a key turning point in ChrysCapital's development. Although the LP didn't come in straight away because it wasn't comfortable backing a first-time fund, Dhawan went back a couple of years later with the makings of a track record and secured a commitment. He accepts that having studied under the chair of the investment committee while a student at Harvard Business School might have helped tip the balance in ChrysCapital's favor.

Dhawan is also an alumnus of Goldman and cultivated relationships ahead of raising the first fund. Approximately 10 partners from the firm contributed their personal capital, including then CEO Hank Paulson. These people's involvement brought in other high net worth individuals and ultimately helped provide a stepping stone for attracting institutional investors.

However, as MVision's Guen points out, the industry is riddled with exceptions. While, broadly speaking, an investor might be more comfortable with a first-time fund run by a trio of former Goldman executives than a team that has spun out from a small Asian bank, there is no such thing as an identikit manager. From natural marketers to industry veterans who have honed their approach through years of practice, there are plenty of GPs who give investors what they want - comfort.

"The essence of private equity whether reporting, investor relations or marketing, is transparency and communication," Guen says. "The more comfortable I am that I can pick up the phone and ask whatever question is on my mind, to which I get a succinct answer, the more likely I am to give you my money - assuming you are able to perform."

Indeed, two managers who come from banking backgrounds tell AVCJ that, while they are comfortable pitching, doing it in a private equity context threw up a few surprises. Both were initially frustrated at some LPs' approach to investing.

One contrasts a corporate CEO who is willing to look ahead and drive value for shareholders with LPs who "invest by looking in the rearview mirror" and operate under a herd mentality. The other regrets approaching public pension funds when raising his first vehicle. "Unless you have reams of data don't bother. They will never get their heads around it first time unless you hype it to such an extent they feel they have to do it," he says.

Same bed, different dreams

This links to the classic GP complaint of attending meetings only to be poked and prodded by junior members of an LP team who may be either poorly informed on the fund and geography, or apparently dead set upon tearing the investment thesis apart. But the argument works both ways and it is rooted in the fact that PE investors tend to be strong personalities who are not afraid to express their views.

"The worst meeting you could have is one in which a GP seems very arrogant or dismissive of an LP," says UBS' Movsoumov. "The professional part of it is important, but so is the personal part. If the LP doesn't like someone or doesn't trust them, they aren't going to move forward. You look at hard facts - the track record, the IRR - but equally there is a soft side."

This might explain why some senior managers are reluctant to step into the room at all and leave the work to junior team members and IR executives, betting that their firm's brand cache and past success will generate sufficient momentum. In theory, a GP with a 5x track record could walk into the room say nothing and still walk away oversubscribed. In practice, it is said that the princelings behind some China funds have stayed on the sidelines and relied on reputation bringing the LPs to them.

However, in a more scrutinizing world, this approach can only be sustained if the returns remain top notch. Fundraising is increasingly a continuous process, hence the rising demand for permanent IR staff who not only meet LPs' needs for greater transparency but also maintain relations with existing and potential investors outside of the formal fundraising process. It is much easier to pitch as a known quantity.

"The model that was pioneered by the mega funds now applies to everyone: you have to recognize that IR is a core competence that has to be permanently executed," says Mark Chiba, chairman and partner at The Longreach Group.

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