As seen in Crain's New York Business Journal

Today’s fundraising environment has been described by some as the most challenging in a long time, which has impacted many emerging managers looking to launch a fund. As a result, many managers have had to rethink their approach to fundraising and how to set themselves apart from an increasingly crowded market.

Citrin Cooperman recently released the survey report, The Path Ahead for Emerging Managers in Private Equity and Venture Capital, which offers valuable insights into the challenges and opportunities currently faced by emerging managers in capital raising and operational efficiency. The survey offers a comprehensive overview of strategies and recommendations for capital raising and covers critical aspects such as fees, terms, and keys to a successful launch.

Some highlights from our survey report include:

• 67% of emerging managers are concerned or very concerned about the macro environment (interest rates, inflation, etc.).
• 62% of emerging managers met with over 100 limited partners (LPs) to close recent funds.
• Only 35% of our private equity (PE) and venture capital (VC) fund respondents have applied for and obtained emerging manager allocations from emerging manager programs or mandates.
• The top three sources of capital are family offices, high net worth individuals, and fund of funds.

Faced with such a challenging fundraising environment, emerging managers are now more than ever hyper focused on certain key elements in an effort to successfully attract LP investors. Some key areas that emerging managers should focus on include:

• Developing an investment strategy: Developing a well-defined investment strategy is critical to a successful fundraise. Your strategy should clearly demonstrate your expertise in this particular investment niche and provide prospective LPs with your value proposition and how you intend to achieve superior returns. This should include also describing the potential risks involved and how you intend to mitigate those risks.
• Highlighting your track record and experience: Competition for allocations is fierce — you should highlight your relevant experience clearly to build credibility with potential investors. Showcase your capabilities through a pitch deck to demonstrate to investors your value proposition and experience with your specific strategy. Highlight your experience by describing your short-term plans including immediate fundraising targets, initial investments, and operational setup tasks. Make sure to clearly define milestones for the first one to two years, as well as long-term plans with how you define success in year five and possible exit strategies.
• Building your team: A strong advisory board is a crucial asset for any emerging manager. It provides strategic guidance, industry expertise, and valuable networks that enhance the fund's credibility and operational effectiveness. By selecting advisors with a proven track record, deep industry knowledge, and strong connections, you can aggregate insights that help you navigate complex challenges and seize opportunities. Don't underestimate the value of selecting strong external consultants or in-house professionals. An experienced attorney can help navigate the legal landscape, a regulatory specialist can ensure compliance, and an independent accountant can bring transparency into the fund's financials.
• Preparing your documents: Having all the required legal and compliance documents ready is essential for instilling confidence in possible investors. You’ll need to prepare subscription documents, limited partnership agreements, compliance manuals, offering memorandums, and due diligence questionnaires in advance. Your documents should provide a clear outline of the fund’s terms and conditions, including fees and expenses, which helps establish your transparency in the investment process.
• Developing a list of investors: Established funds may have access to more institutional allocators in addition to family offices, wealthy individuals, and fund of funds. The results of Citrin Cooperman’s recent survey report indicated that the top three capital sources for the report’s emerging manager respondents are family offices (cited by 70%), wealthy individuals (cited by 64%), and fund of funds (cited by 43%), with institutional capital trailing behind. As you start to develop a list of potential investors, build a list of investors that have historically invested in an emerging manager with your strategy. Research potential investors to understand their investment preferences and past allocations. Focus on investors that believe in your investment thesis.
• Leveraging your network: Fundraising can be time-consuming, but emerging managers can benefit from creatively using available resources to augment their efforts. Consider partnering with a third-party marketing firm to expand your reach and connect with investors who might not have been otherwise accessible to you. In addition, grow your network by leveraging industry associations and conference events to develop new relationships, insights, and connections with others in similar positions.
• Considering all possible pivots: Listen to the feedback from prospective investors; it can be valuable in adjusting your strategy so you can continue to strengthen your value proposition to potential investors. This could include modifying your fee terms, honing your investment thesis, or adding discussion around topics like environmental, social, and governance (ESG) concerns.

While the fundraising environment for emerging managers has been challenging the last couple of years, there are reasons for optimism, especially over the longer term. Interest rate cuts this year coupled with improved exits from existing funds will add more liquidity to prospective investors. Emerging managers with a strong team and a well-defined investment strategy will be in a position to take advantage of improved market conditions and a better fundraising environment.

To learn more about the path ahead for emerging managers, contact Alexander Reyes at areyes@citrincooperman.com.