In the fiercely competitive world of private equity, emerging fund managers face daunting challenges, particularly as they seek to distinguish themselves and earn investor allocations. Here are five key strategies I believe can propel emerging managers toward success.
Find the Right Fund Size
One crucial aspect that emerging managers should focus on is appropriately sizing their funds. As the saying goes, "Your fund size is your strategy." The allure of raising substantial amounts of capital may be tempting, especially in a heated market, but it can often lead to diluted returns. Carefully consider the optimal fund size that aligns with your investment thesis and allows you to maintain discipline. Learn from the experiences of those who have encountered muted returns after succumbing to the allure of expanding their fund size too rapidly.
Add Value through Expertise and Alignment
Another critical factor for emerging managers is to highlight their ability to work closely with portfolio company management teams and add tangible value. Limited Partners (LPs) are increasingly seeking managers who can offer more than just capital. Showcase your team's deep expertise in specific markets, and emphasize the value you bring to the table beyond financial investment - for instance your team's ability to help offer some strategic insight to the LP on its other investments outside of the fund.
Alignment between the manager and LPs is vital. LPs want to see managers with "skin in the game," investing a meaningful amount of their own funds into the deal. This demonstrates a shared commitment and a vested interest in the success of the fund. By aligning interests with LPs, emerging managers can build trust and establish themselves as reliable and dedicated partners.
Create Opportunities and Nurture Relationships
To differentiate themselves further, emerging managers should explore avenues to provide added value to their LPs. Co-investment opportunities are an excellent way to enhance LPs' returns while forging stronger relationships. By leveraging your network and expertise, you can identify attractive investment opportunities that align with your fund's strategy and offer LPs the chance to participate alongside your fund.
Additionally, nurture and maintain relationships with LPs beyond fundraising. Actively engage with them, understand their goals, and seek ways to support their investment objectives. By demonstrating a proactive approach and going above and beyond mere fund management, emerging managers can cultivate long-lasting partnerships based on mutual trust and respect.
Learn and Adapt
The financial landscape is constantly changing, and staying informed about market trends and opportunities is crucial. Adapting to new ideas and industry best practices helps differentiate managers and attract investors. Effective risk management requires continuous learning to identify and mitigate potential risks. Adapting to regulatory changes ensures compliance and mitigates legal and reputational risks. Ongoing learning enhances deal sourcing capabilities and execution precision. By embracing continuous learning and adaptation, emerging fund managers position themselves for success in this dynamic and competitive industry.
Focus on Long-Term Performance
While it may be tempting for emerging fund managers to rapidly scale their operations when the market is favorable, it is essential to remain focused on long-term performance. By maintaining discipline and avoiding short-term gains at the expense of sustainable growth, emerging managers can position themselves for lasting success.
For emerging private equity fund managers, success hinges upon all of the above factors. Appropriately sized funds, long-term performance focus, value-adding expertise, and compelling benefits to limited partners are essential components. Constant learning and adaptation also play a critical role in a fund manager’s journey to the top. By staying informed about evolving market dynamics, embracing industry best practices, effectively managing risks, meeting investor expectations, honing deal sourcing and execution skills, navigating regulatory complexities, and fostering valuable relationships through networking, emerging managers can differentiate themselves and seize opportunities in this competitive landscape.
Foster a growth mindset and a commitment to continuous improvement, and you’ll be well on your way to forging a path to prominence in the ever-evolving world of private equity.
Sean Frank is the founder and managing partner of Cloud Equity Group, a Wall Street-based asset management firm focused on tech-enabled business service providers in the lower middle market. He can be reached at sfrank@cloudequitygroup.com.
