Making the first move ..

02 April 2009

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Fundraising is never an easy exercise, but now more than ever its a gruelling one. If you're raising a follow-on fund expect your existing LPs to take months to reach a decision on whether or not to re-up. This is not always, as may be cited, a liquidity issue; more likely it is them re-assessing you and the rest of their portfolio. Expect half to re-up (three quarters if you're lucky), but even then at lower levels than they've allocated to previous funds. One placement agent tells your editor many are re-upping just a fifth of their previous allocation.

As such, expect your current fund to take a full year longer to raise than your previous one did. And if it's your first fund, wait a full year before formally beginning marketing the vehicle, since virtually no LPs are considering first-timers. It is better to wait for a receptive audience than it is to push something onto an unresponsive market and risk destroying momentum.

Part of this wait-and-see approach by LPs is a desire to join a bandwagon rather than be a pioneer. Even longstanding LP/GP relationships will find the former hesitant to sign up to a fund before others have and before the all-important first close is achieved. As such, many are considering a new approach: a small core of LPs coming together to provide initial capital available for investment. Rather than constituting a formal close, it would simply be there should any pipeline opportunities materialise.

As and when this builds up, the GP hopes other new investors will be more inclined to get involved, since they can see what they're buying into. The management fee would only kick in after a certain critical mass is reached, meaning the initial LPs are rewarded for their risk by effectively having their costs cut.

In today's market it seems the early bird is left to squirm, but it may also find there are rich pickings to be had.

Yours sincerely,

Kimberly Romaine

Editor-in-chief, unquote"

Tel: +44 20 7004 7526

kimberly.romaine@incisivemedia.com.