In a recent industry forum, a panel explored the difficulties of attracting new Limited Partners (LPs) and emphasized the long-term benefits of focusing on quality investments.
Since the onset of the COVID-19 pandemic, the fundraising environment for Private Equity (PE) and Venture Capital (VC) has been fraught with challenges. Economic uncertainties and political turbulence have only exacerbated this. As we look towards 2025, key questions arise: Will the industry need to adapt in terms of fees and ownership structures to foster growth?
These pressing issues were at the forefront of discussions at the Private Equity & Venture Capital Forum held at JTC’s Boston office in October 2024. The panel delved into recent trends, highlighting that while attracting new LPs is increasingly challenging, maintaining those relationships can be straightforward if fund managers understand what fosters investor loyalty.
Expert Insights on PE & VC Fundraising
“It’s no secret: we’ve seen a lot of headlines in the press about fundraising headwinds,” said Matthew D. Geduldig, Partner at Proskauer Rose LLP. “However, we are also witnessing larger and larger funds from well-established asset managers – indicating a flight to quality.”
The rest of the panel concurred, noting that fundraising difficulties are not uniformly experienced across all sectors.
“It’s very sector-specific,” noted Proskauer Rose LLP Partner Kerry Fitzgerald Shriver, who has observed an encouraging uptick in Q4 deals. “It’s taking longer, but deals are getting done.”
It was raised that there is a tendency for investors to continue working with managers they know because it minimizes due diligence compared with switching.
“LPs remain super selective,” added John B. McCormick, Partner at Monument Group, emphasizing that while existing LPs may be retained, attracting new ones requires exceptional performance.
The panel discussion highlighted a difficult question at the heart of fundraising in today’s market: if LPs are more likely to stick with managers they know and trust, how can fund managers attract new LPs and achieve the growth they seek? And if the best strategy is to keep the LPs you already have, what is the best way to go about that?
Are HNWIs & retail investors the answer?
The promise of retail investors has been well-documented, but as the panel discussed, incorporating those investors is still a sizeable challenge for most firms.
Despite advancements in vehicles, distribution platforms, and financial technology over the past five years that have made access somewhat easier, the process is still far from straightforward.
McCormick, who took a cautious outlook to the idea, commented “I think the client base is getting more comfortable with the broader asset class, so you’re going to see more. I worry a little bit, because I don’t think they’re appropriately staffed and resourced to manage it like more institutional LPs.”
“You really need an infrastructure,” stated Shriver. “You need a separate team, you need a separate back office. You really need to build all of that out to do it the right way.”
Several panelists expressed skepticism about the short-term prospects for HNWIs. They questioned the feasibility of transforming an asset class that derives significant value from its illiquidity into a liquid one while still maintaining its high returns. They emphasized that a significant educational effort would be necessary to address this challenge.
While it’s still possible that HNWIs could be the future of the sector, it is unlikely that any one fund, especially one of smaller size, could perform the education and infrastructure-building the panelists talked about with the immediacy to take advantage right now. But where are those smaller funds and emerging managers supposed to find their LPs if the investors of the future aren’t ready and traditional PE investors are hesitant to switch?
Can emerging managers compete for capital?
The panel acknowledged that even with a good team and strategy, emerging managers face significant challenges. They highlighted the difficulties in conducting due diligence on a new team, emphasizing the practical concerns involved in working with new managers regardless of their credentials.
“I think they’re still looking for track records,” remarked McCormick, posing a challenge for newcomers.
Shriver noted that in a tough fundraising environment, first-time managers have had to get creative in order to attract investment until they can build a reputation and rapport with long-term clients.
“They might do a series of SPVs or one-off investment vehicles,” said Shriver. “It helps them build their track record, and they can use that momentum into getting to that first closing for the commingled fund that they eventually want to get to.”
The panel approved of the approach that involves incubating a deal, doing whatever is necessary to complete it, and gradually building a portfolio. This method allows firms to eventually present a tangible track record and demonstrate performance to potential investors.
McCormick said co-investment “should be first and foremost in everyone’s mind” because “it’s a nice way to introduce yourself, build the relationship,” even if doing so requires having an LP “take a piece of the management company. It just helps you get to that first close.”
Standing out in a competitive environment
While every manager needs to stand out in a fundraising environment like the one we currently face, the panelists stressed that there isn’t a solution that will work for everyone.
“What works for a small manager is probably not the same carrot that’s going to work for the large manager,” said Geduldig.
“I’ve seen a lot of managers really focus on the investor relationship and being clear and consistently transparent,” said Shriver.
Offering fee discounts may help but it is not a guaranteed strategy, McCormick remarked as “investors need more compelling reasons.”
“Performance is the ultimate differentiator,” McCormick concluded.
The consensus was that established managers hold an advantage as LPs lean towards trusted relationships. Whether changes in fee and ownership structures will help, or if new capital sources such as HNWIs will change the fundraising landscape, remains to be seen, but what the panelists emphasized was that until we witness a sea change industry-wide, doing the little things will matter.
That’s where efficiency and transparency come in. JTC supports fund managers in providing seamless experiences for their LPs, from onboarding through the entire investment lifecycle. Once you’ve attracted investors, we can help you do what it takes to keep them.
To learn about JTC’s fund administration solutions, please contact Jeff Drinkwater directly.
