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How to Fundraise for Your Private Equity Firm: The Ultimate Guide



Do you have a private equity firm that needs to raise money? Are you not sure how to get started? Don't worry; you are not alone. Raising money for a private equity firm can be difficult, but with the right strategy, it can be done. This blog post will discuss the best ways to fundraise for your private equity firm. We will cover everything from attracting investors to creating a fundraising plan. So whether you are just starting or struggling to raise money, this blog post is for you!


Why fundraising

Before diving into the step-by-step fundraising process, let's first understand why you need to fundraise. The answer is pretty simple: because your private equity firm needs money. However, the details surrounding this decision may not be very clear.


There are many reasons why raising money should be a priority for your firm:

(1) You have an opportunity to invest. In other words, you have a business leader that can potentially invest in your private equity firm. An example of this would be the acquisition of a company or franchise. Whatever type of investment it is, if money is being exchanged for equity, you need capital to get started.

(2) You are trying to grow your business. If you are an existing private equity firm, then chances are you want to expand. This is the case for 66% of firms. In addition, most firms raise money because they want more assets under management (AUM).


(3) There is a potential liquidity event coming up. A liquidity event occurs when a firm sells the business. Many different events can occur, such as a company sale or IPO. Still, it means your private equity firm is going public, and you need money to finance this process.

(4) You want to pay off debt. If you have any outstanding loans, you will eventually need to pay them back. Whether you decide to do this out of your pocket or outside the capital, you will need money.


(5) Your firm is financially sound and growing. This is the best reason for fundraising. You are already making a profit but have more money that you can use to reinvest in the business.

There are many more reasons you will want to raise money for your firm.


Why Do PE Firms Need to Raise Money?

As a private equity firm, you will need money to invest in your portfolio companies. Without capital, your growth as an investor is severely restricted. Raising money is one of the most difficult parts of running a private equity firm, but it is crucial for future growth.

You can raise money from three key groups

  • limited partners

  • banks, and

  • retained earnings.

Limited partners are typically wealthy individuals or institutional investors looking for higher-yielding assets like PE funds. Banks are usually interested in providing debt financing for larger deals or bridge loans to fund acquisitions before receiving their next LBO drawdown date. Retained earnings are simply profits raised from your current portfolio of companies and reinvested back into the business.


As a general rule, if you can raise more than 30% of your total capital from retained earnings, you will be in good shape to grow as a private equity firm. Values generated from internal cash flow provide a much cheaper source of funds than borrowing money or selling ownership stakes to investors. Thus, they significantly increase your chances of success as a private equity firm!

Now, let's discuss some great ways to fundraise for your private equity fund.


(1) Leasing Underleveraged Assets

This means that instead of borrowing money from private equity investors to acquire new investments, the PE firm uses its own portfolio companies' strong balance sheet cash flows as a source of money for holding these investments. Do not forget about the optionality value of being able to sell your ownership stakes in these companies at any point in time.

(2) "I" Corp Structure

Since a PE firm's output is measured by how much money its investors make, the best way to assess this is by setting up an "I own everything" corporate structure. That way, your fund LPs can be reassured that all of their funds are used to make them more money and not wasteful spending. Just be sure to distribute enough "I owe you" (IOU) paper to your LPs, so they don't all try and pull out their money at once!

(3) Mandate creep If your private equity company succeeds in making good investments, the PE firm will want to put more capital into its existing holdings. So it would help if you had a way of doing that without dipping into any new pool of capital. The best way is by having the ability to send back vested (aka already paid for) shares and options and reissue them, hopefully at a higher price point. This activity is called 'creeping,' and institutional investors expect it whenever they invest in funds managed by a PE firm with outstanding performance records.


(5) Portfolio Management

This is something that comes with experience. The more successful investments any PE firm makes, the more expected to put new money into its existing positions rather than new opportunities. Thus, after a couple of years, the portfolio management process becomes increasingly important for continuing cash inflows. A strong portfolio management capability ensures that funds are deployed efficiently, and any excess capital is returned to investors on a timely basis.


(6) Tax efficiency

Taxes are an obvious factor in fundraising as they affect the net returns generated by your fund(s). Generally, tax-efficient vehicles generate better net returns for investors, which means you can charge them fewer fees! Discounting fees on more considerable amounts helps, but it's not always possible. So a good first step is to look for private equity funds taxed as pass-throughs rather than C-Corporations.


(7) Reputation

The reputation of your firm within the industry helps you obtain more favorable terms from investors and lenders alike. In addition, it helps you retain employees by increasing their job satisfaction and attracting top talent. As a result, you must establish a strong brand representation through public relations, marketing campaigns, and word-of-mouth sales since this could ultimately help you raise money faster. And because maintaining a good reputation requires effort over time, it should be factored into your fundraising strategy at an early stage! While there may be many other reasons why your company might want to consider undertaking marketing initiatives, in this blog post, I will focus on one of the essential reasons: raising money.


What does equity-financed mean?

The main goal of a fundraising campaign is to raise money for your private equity firm. Equity finance, also known as venture capital financing, is a form of financing that allows the investor(s) who provide the funds to own an ownership stake in the company or entity that they are providing the funds to. In general, it refers to money investors put into a business in exchange for an ownership share.


Equity fundraising process

The first element of your fundraising campaign is figuring out what you need to raise. If you are looking to find new investors, the amount will be much smaller than if you are trying to expand. For example, a business that wants to expand into a new market will likely have a much larger target goal than one that just needs additional capital for day-to-day operations.

In general, if you want money to start/expand a company or project, consider these factors:

  • How much will it cost for research and development?

  • How long before the investment can be realized?

  • What costs may arise along the way, and

  • How much could come from other sources? The second step is deciding where to go for your money.

This decision will be based on the amount you are looking to raise, how much time you have, and your plan.


How do I attract investors?

Market Yourself Effectively To attract investments from potential investors, and you must market yourself effectively. Here are a few tips on how you can go about marketing yourself: Network with others who could help spread your message: You never know who might have connections with potential investors.


Make sure that you reach out to them if you have any connections with investors. If you do not have any connections, try reaching out to business associates or even old college buddies. You could also join groups specific to your industry and use those resources as well.


(1) Create a website.

It is important to create an informative yet attractive website.

Make sure it is up-to-date, easy for the public to access, and contains information about who you are and what your firm does. You should also update yourself regularly with news articles related specifically to either your firm or the sector you work in.


Publish articles on popular platforms: Publishing articles on popular platforms can help increase your following exponentially overnight! For example, try writing guest posts or publishing articles on LinkedIn, Forbes, or Entrepreneur.com.

These websites drive a lot of traffic and can help you reach a wider audience.


(3) Start a blog.

A simple way to increase your following is to start a blog related specifically to your firm or sector on popular platforms such as Medium. This will raise awareness about who you are and what you do by creating more opportunities for people to learn about your private equity firm.


(4) Start a newsletter

A newsletter can be an easy way to provide your existing or prospective investors with updates on important happenings at your private equity firm. Additionally, it can be used as a direct selling tool by showcasing past successes and growth numbers. Start one on Mailchimp or Tinyletter - both are free options!


(5) Invest in customer relationships

The importance of investing in customer relationships cannot be stressed enough! These relationships take time to build, but once you have them, they are invaluable. This investment is not only financial but also time-wise. Showing prospective investors how much you value their business will help convince them that investing in your firm is the right decision.


(6) Try paid advertising

While it may not be the best option for you, paid advertisements on LinkedIn and Google work quite well. The key with any advertisement is to ensure that they direct interested parties to a webpage where they can submit (and ideally, create) an account and sign up for updates.


(7) Make business plans

A concise yet comprehensive private equity business plan is extremely important when raising capital. Therefore maintain one that is updated frequently and use it as your main fundraising tool. Of course, you can always use free tools like Canva or Prezi to help keep everything looking professional!


(8) Be enthusiastic but realistic

When pitching investors, being too aggressive will turn them off immediately, while being too passive will bore them into not wanting anything to do with you! This is especially true when trying to raise money for your private equity firm. A good way to balance this is by being enthusiastic and remaining realistic regarding your expectations.


(9) Be patient

Raising capital takes time, don't get discouraged if you can't secure funding right away! Make sure that you have a plan in place so that when investors start closing doors, you can move forward immediately with no issues. If people say they would like to come back later, follow up on them after six weeks. If it has been even longer than six weeks since the initial contact, consider writing "follow up" on the file of each person who hasn't acted yet, so it's fresh in their mind when they come back.


However, don't try to over-complicate things. If it seems too much work, you will probably get pushed back on your efforts. If the investors don't want to hear from you frequently, give them some space and come back in six months. You can always email them with updates on new investments that you have made since then to keep the conversation going without being too needy of their attention.


(10) Be proactive

A study shows that even though most companies wait for investor introductions only 16% of the time, they successfully use this strategy. In addition, 85 percent of cold-called CEOs could secure a meeting. Finally, don't be afraid to connect with potential investors; you may be surprised by the outcome.


(11) Events

Now that more people use social media, private equity investors rely less on formal events to network. Interesting, right? However, while events are not as necessary for networking anymore, they can still be very helpful in the fundraising process. Attending conferences and industry-related events is a great way to stay relevant and get investor attention. Don't forget: you never know who will use the event as an opportunity to meet with you!


(12) Webinars

Speaking of webinars, these are another great tool for staying relevant. These days many people don't have time to watch a live webinar on investing. However, if they miss one, someone might send them a link or pop up on their Facebook news feed.


So create one every couple of weeks and make sure to promote it. It can be a great way to network and contact new people.


You know the saying "out of sight, out of mind?" Well, this isn't true when it comes to fundraising. If you want investors to find out about your firm, make sure they know you [5]. It would help if you kept in touch with them regularly (quarterly at the very least). Doing this will help them remember who you are when it approaches time for them to invest in something new.


The biggest secret to fundraising is simple:


Stay relevant.

Don't get left behind while other firms get ahead of you because it could mean trouble for your firm if they do. When it comes to staying relevant, you must create a fundraising plan


Create a Fundraising Plan

Creating a fundraising plan seems simple, but it is a highly effective tactic to raise money for your private equity firm. To create one, write down the name of every investor that has previously invested in your firm and why they did so


After this...you will need to develop ways to make these people want to invest in you again (or for the first time). You also need to keep track of how much money each person invests because this can help determine their level of interest in investing in your future funds. Finally, take the time to map out the current network of investors. You can do this by making a list of all your connections that may access other investors


After creating this fundraising plan, you should see some gaps in your investor base. This is what you need to start working on filling. To do so, ask past investors if they would be interested in investing in future funds or if they know anyone else who might be interested

Bottomline

With the right strategy and help, your private equity firm can be on its way to securing the funding it needs to grow. Contact us today if you're feeling overwhelmed or don't know where to start. Our team has years of experience helping businesses secure the investment they need to succeed. We would be happy to discuss your fundraising goals and put together a plan tailored specifically for your private equity firm. Thanks for reading!

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