According to the well-respected Boston Consulting Group, the global asset management industry amounted to an astonishing $100 trillion in 2021. While Private Equity may only be a small subset of that $100 trillion, it’s still an incredibly diverse subset.
To better understand the diversity of the Private Equity sector, let's classify investors under three primary dimensions:
No matter the size, type, or industry of institutional investors, sponsors and managers all have one common need: to find investors. Where does one even begin to look?
A few key ingredients are generally required to attract private investors to fund your deals. As you might imagine, they all relate to two qualities: experience and expertise.
Having an existing track record as a fund manager or independent sponsor can instill a baseline level of trust in your potential investors. Additionally, gaining expertise in deal sourcing can translate into a proven quality of deal flow. For instance, being familiar with venture capital sourcing methods and how scouts operate can be determinant.
But the main question is, what is the best way to source investors effectively? What are the best places to look for your future LPs and deal sponsors?
Each fund and professional investor have its own network of LPs and will attract different types of LPs based on the three dimensions we described above. What we can do here, however, is to go through a general list of different types of investors that investment professionals go to when they are looking for private equity fundraising.
Banks advertise, sell and broker a wide range of financial instruments to their customers and cater to their customer profiles. Investing in private equity funds is generally part of their offering for their Private Banking clients.
Banks like BNP Paribas also have or used to have their own PE team and in-house PE / VC investment funds. But a change in the regulatory environment following the subprime crisis required banks to substantially increase their capital positions and liquidity buffers. However, these banks generally continue to fund these investment vehicles as LPs.
Pensions funds are well-known whales sitting on vast piles of cash. It may be counterintuitive to think that investing in Private Equity and VC would suit these (generally) risk-averse organizations. Still, their assets under management are so substantial that even by allocating only 1% of their portfolio to high-risk investments, they represent a significant source of capital for PE fund managers.
Due to their size, pension funds will generally be more suitable for larger PE funds.
The same logic applies to banks and insurance companies that manage billions of dollars in cash and who had their share of PE arms spun off. The most famous one in Europe is Axa Private Equity which became Ardian in 2013. Today it's one of the most prominent European PE investment groups.
Sovereign wealth funds can be as significant as pension funds but are likely to pursue a more aggressive investment strategy. Also, since they are derived directly from money generated by a government, they will have a keen interest in investing in industries, markets, and technologies that represent a strategic focus for their country.
So, if you are trying to fund deals in the energy sector, for instance, you may pique the interest of sovereign wealth funds, but do expect these LPs to be driven by a political agenda.
Often corporates have an investment arm specifically designed to take a position in promising technologies or start-ups they’re afraid may become direct competitors. Managers can institutionalize this initiative with a defined investment department, or they can invest in deals on a more opportunistic basis.
While being an LP to a private equity fund may be less common amongst corporate investors, they can be a good funding source for independent sponsors looking to fund a specific deal on their market.
University endowments are particularly significant in the US, where alumni giving back to their former institution is deeply anchored into the national culture. Universities sometimes even have their own VC firms/investment arms that can either finance start-ups that are part of their incubator program or finance start-ups founded by their alumnus.
University endowments may also be a good source of funding for companies developing state-of-the-art technology or working on advanced research that could benefit from the university's knowledge and resources. These collaborations might also strengthen the university's international recognition on the subject, which can be a win/win.
Foundations in the US have close to $900 billion in assets. Of course, not all this money is meant to be invested, but there could be some room to knock on their door and get them on board to fund your project.
Foundations, by nature, are more likely to support projects in line with their purpose. But with the increasing popularity of impact investing and sustainable projects, a growing class of fund managers and impact VC funds might qualify for an investment from these foundations.
Fund of funds are professional organizations that raised funds from the above categories of more prominent asset managers. Their investment strategy is to invest in several investment funds (as the name reveals). Due to their stringent operating and investment processes, fund of funds are more appropriate for fund managers and VCs who already have a successful track record.
Family offices source funds from the net assets of the wealthy family that they represent. Because family offices are tied and often managed by family members, the range of family office investment strategies is much more significant and flexible than traditional PE funds.
In short, it's their money, so they can invest how they see fit, giving them the autonomy to be opportunistic. If they like you and believe in your vision, they might be interested in diversifying their portfolios by investing in your project.
Individuals running investment funds are generally wealthy individuals themselves, and it’s their job to invest. They typically understand the critical nuances of investing.
If you don't already have pre-existing connections to PE fund partners, this will be a challenging route to take, considering they have many investment opportunities and are more likely to reinvest their money into their own fund. However, If you present them with an innovative approach or if what you’re doing is very different from their core market, they may be interested in chipping in. Having seasoned mentors to help you manage your own fund may also be a great advantage.
These networks are full of entrepreneurs, investors, and statistically above-average income earners. Think Stanford, Harvard, MIT, etc. If you have a way to tap into these networks and pitch your fund or your deal to these associations, this is a real opportunity to get your idea in front of a broader net of suitable LPs.
Connections are key. Accelerators and incubators like Y Combinator, for instance, are well connected, but they generally invest in very early-stage companies. For that reason, they would probably not be appropriate to fund your deals (assuming your target companies aren't just starting out). However, a good portion of their alumnus has either gone through a successful exit and might be looking to invest in new deals or have raised several funding rounds, so they're likely well connected to the private investment scene.
Business angels are not necessarily the wealthiest investors and may be limited in how much they invest into a deal ($25k-$100k), but they generally have good business acumen and connections. They are also typically more passionate about investing in new businesses.
If you value expertise as part of what your LPs can bring to the table, trying to tap into business angels networks like AngelList can be a valid option.
Funds that want to address a specific industry may be well inspired to bring together A-list executives of successful companies in the space they want to invest in. They’ll bring the expertise and the network to help make investments successful and will be an additional selling point to entrepreneurs shopping around and looking beyond the money before accepting investment from VCs or PE firms.
Another good strategy in the specific case where you’re raising for a deal involving a B2B company is to raise directly from executives that fit the description of the buyers you’re targeting for your product. There are multiple advantages of working with investors who are also users of the product. They can give you valuable feedback, help you iterate faster, and can be strong advocates of your project within their industry.
If you already run a fund or M&A practice and had successful exits, reaching out directly to people you’ve worked with and helped succeed in the past could be effective. They already know you quite well, you’ve built a strong rapport with them, and they know how you work. Plus, they could bring more operational expertise to the table to help you with your acquisitions.
Crowds and crowdfunding can be a great source of funding, especially if the deal you want to raise money for can benefit from the exposure. It could be through a dedicated platform or social media (even Twitter).
Crowdfunding is more suitable for smaller funds. However, platforms like AngelList and new popular vehicles like rolling funds made this a new option to consider. You must be careful about regulation, limiting the number of people who can invest in your venture and the type of investors (e.g., accredited).
We’ve already covered a few categories that include wealthy individuals, like successful CEOs, but overall, all individuals with high net worth and not falling within the above categories can work. They may be less familiar with the Private Equity investment world and will generally be friends of the family (even golf buddies!). They’ll likely need to be educated about the investment world but can be a reliable and hands-off source of funding to help you get off the ground.
Capital placement agents are the fundraising advisors in the world of PE. They have connections with the different organizations listed above and can help you design your marketing materials and get the word out. If you have a well-defined strategy and a bit of budget you can afford to spend on fundraising advisors to focus on your core business, it might be worth investigating. It is all about how you most effectively use your time to deliver the most value.
While not exactly an investor like the others, self-directed IRAs can be an effective way for new and existing LPs to access more capital to invest with a fund or in a one-off deal. Many investors have cash tied up in an IRA that they'd like to diversify from traditional stocks and bonds. Also, from the LP perspective, investing through IRA may offer potential tax advantages.
Overall, raising funds for a fund manager can take up to one or two years to complete, especially for new fund managers.
Approach organizations that are likely to be the best fit for your profile and the industry you're looking to invest in.
Also, if you are a new fund manager looking to raise your first fund and you have come up with an innovative strategy, one of the best things you can do is get the word out. It may take time, but sometimes all you need is one investor with whom your message truly resonates and shares your value and vision.
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