A High-Level Guide to Private Equity Fundraising

Private equity fundraising
Ablorde Ashigbi

Ablorde Ashigbi

is the CEO of 4Degrees, a Chicago-based technology company, building relationship intelligence software for relationship driven industries. Before 4Degrees, he was an investor at Pritzker Group, and a consultant at Bain & Company.
This private equity checklist will help you find LPs for your fund. Go through these categories and make sure you have a compelling answer for each.

In the past decade, private equity has delivered stellar results outpacing other alternative investment asset classes. According to McKinsey, despite some pandemic-induced fundraising volatility in the first half of last year (2020), AUM across private markets grew 5.1% to an all-time high of $7.4 trillion, with PE accounting for the largest growth. As a result, many ambitious managers are looking to launch their private equity funds.

One of the core tenets of raising capital for a private equity or venture fund is having a well-thought-out answer to the “Why should we invest in you?” question asked by prospective investors or limited partners.

If you don’t have a convincing answer – or any answer at all – they’re bound to abandon you for any one of the thousands of funds or asset classes they evaluate every year, such as hedge funds, real estate, etc. Thus, successfully answering this question requires extensive research and an in-depth understanding of your fund’s investment strategy and thesis.

To help your fund’s general partners articulate an excellent answer to this question, we’ve put together this private equity fundraising guide. Go through these categories and make sure you have a compelling answer for each.

Determine Your Strategy and Competitive Advantage

Investment Strategy

Before going any further in the fundraising process, it’s crucial to articulate your new fund’s investment and capital allocation strategy. For example, what business focus will the fund adopt? Are you looking to invest in early-stage startup companies (venture capital), established growing companies (growth equity), other funds (fund of funds), or in more traditional buyouts? Will the fund have a specific geographic focus? or industry focus?

A vital question fund managers should know how to answer is how their fund differs from other competitors and benchmarks? Developing a sound investment strategy requires a thorough understanding of the industry or sector before moving on to the capital raising stage.

Limited Partner (LP) expectations vary depending on their relationship to the sponsor, their goals, and their level of sophistication. However, all LPs are interested in learning how the assets your fund will invest in will generate returns. Furthermore, you and your team need to be honest and disclose the potential risks and how you plan to respond to them.

Competitive Advantage

What makes your fund unique? Why should investors commit their capital to you instead of other investment funds with a more established track record or a different investment strategy? If there’s nothing remarkable about your fund, it will fail to raise the capital required to commence operations. You need a solid differentiator to win bids, not just a willingness to pay the highest returns.

Your LPs will want to know that you have a thorough understanding of the competitive landscape and how you will respond to it. In addition, they will want to see comprehensive short- and long-term plans, a detailed risk management plan in case of steep market downturns, cyber-attacks, and other threats to the fund.

Many PE firms establish an advisory board of industry experts to provide the GP’s with non-binding strategic advice, make introductions and show credibility with potential investors. Additionally, your fund should hire external consultants or in-house professionals, including an attorney, a regulatory expert, and an independent accountant, among others, depending on the type of fund.

Figure Out Your Fund Structure and Model

Fund Size and Fees

The size of your fund should relate to your investment strategy. Consider the market cap of potential portfolio companies, how much you plan to invest in those companies, and the number of LPs you’ll recruit during the PE fundraising process. It’s usually wiser to set a conservative fund size to generate demand, so it is easier to meet your funding objectives.

You’ll want to set friendly terms for your limited partners if you are a first-time fund manager. Keep your fees around 1.25%-2.00%. You can raise your fees and shift your terms in your favor as you develop a track record of success.

Metrics and Reporting

When discussing your return projections with potential LPs, you’ll want to put them in context to help them understand their risks and tradeoffs. For example, due to the irregular timings of cash flows from LPs to fund managers and vice-versa, PE returns are measured differently than other asset classes with higher liquidity. Similarly, benchmarking PE investments against other asset classes is not a straightforward exercise.

Although the specific metrics you publish will depend on the nature of your fund, your reports should include the following metrics:

  • Net IRR: Net internal rate of return
  • TVPI: Total value to paid capital
  • MoIC: Multiples of invested capital
  • DPI: Distributions to paid capital
  • RVPI: Residual value to paid
  • Loss Ratio: The percentage of capital in deals realized below cost

Identify Your Target LPs

Identifying the right limited partners to reach your level of committed capital is a critical step in the fundraising process of a private equity firm. Once your attorney has drafted your offering memorandum, partnership terms, subscription agreement, and other documents, you can begin to identify LPs and fundraise actively. It is also important to have gathered feedback from trusted friends and contacts before venturing out and engaging with potential LPs.

Before looking for potential investors, we recommend you and other GPs invest in your fund. New managers typically invest 1%-2% for their first fund. Fund managers not having any “skin in the game” can be a deal-breaking issue for some LPs.

Each investor you bring into your fund has its own goals, requirements, and concerns. On the one hand, you want a diverse group of partners, so unexpected dropouts don’t cripple you. On the other hand, you want LPs whose goals are similar enough so that everyone buys into the mission and strategy of the fund.

Generally speaking, there are three types of LPs, and depending on your fund, you want a healthy mix from each group:

  • Patient capital: Large institutional investors (like foundations or university endowments) can meet their capital commitments and usually aren’t easily influenced by business cycle swings. They might have a lot of cash but can’t deploy it quickly due to strict investment policies.
  • Value-add capital: These investors don’t just contribute cash. They also assist in finding deals, winning them, and getting through the management phase. These LPs can be a significant advantage and are often high-net-worth individuals.
  • Flexible capital: This typically comes from funds-of-funds, which have the resources for fast due diligence and capital deployment, but they usually look for quick returns to cover their double layer of fees.

Where do you find LPs for your fund? Through your network. The strength of a relationship can be the deciding factor when raising private equity funds. Leveraging your network requires a deliberate approach to relationship management with the right processes and tools.


Consider if you’re willing to permit co-investment at a later point. Many LPs seek co-investment because it offers higher returns by avoiding PE fund fees and carried interest. In addition, it lets LPs investigate or “try out” fund managers before formally allocating part of their capital to the fund. According to a 2015 Preqin survey, fund managers generally view co-investment opportunities as necessary for successful fundraising.

Naturally, these kinds of arrangements complicate things. There’s always more complexity when you involve more people, especially with unique needs and goals. Nevertheless, co-investment could be a valuable way to bring more capital as needed.

Private equity fundraising

Determine Your Fund’s Marketing Strategy

Your network will most likely be your most significant funding source, and even though private equity has the word private, it does not mean you will not need to market the fund actively. For example, when meeting with potential LPs, you need to have certain documents and marketing collateral to provide the potential investors with the information they need. Additionally, you will want to make sure you leverage the power of content and social media to position your fund as a leader and build its brand.

Elements such as subscription documents, due diligence questionnaires, team background information, slide decks, and other documents should include your firm’s branding and be kept in a virtual data room. Then, as you take more meetings, refine these documents to address the concerns and objections voiced by potential LPs.

Having a professional website and profiles on Twitter and LinkedIn where you articulate your fund’s investment strategy, expertise and share relevant content can showcase your firm as an industry thought leader and attract more partners and deals. In addition, as the fund grows, you can host events and webinars to raise your firm’s profile and raise subsequent funds.

Management Team

Having the right management team for a new fund can mark the difference between success and failure. Potential LPs will want to meet the team and learn about their professional background, credentials, and past achievements. In the world of alternative investments, where there is not much data available, the management team’s quality and network are crucial elements for securing funding.

Make sure that anyone involved on your end has a proven track record of success, experience within the industry, and the ability to identify opportunities, mitigate risk, and pivot if necessary. Break down your track record (or whoever is managing the fund) by actions of the investment cycle:

  • Deal flow origination: Discovering companies, recruiting investors, and negotiating terms.
  • Investment performance: The actual financial returns of the deals and/or funds you have managed in the past.
  • Hiring: The talented people you have hired in the past and their successes.
  • Timing: Your ability to enter and exit deals at the correct times.

The size of your team will vary depending on the size of the fund and investment strategy but consider having the following professionals: a CEO, Operations Officer, Investment Officer, Financial Officer, Compliance Officer, and investor relations professional, among other support staff.

Executing and Iterating on the Fundraising Process

Fundraising is an iterative process. By meeting with more potential limited partners, you will refine your pitch and learn what specific investor groups are looking for in a fund.

To ensure you have productive meetings and get the most out of them, you should incorporate the right IT tools, including an intelligent relationship management platform like 4Degrees, specifically built from the ground up for PE firms. 4Degrees leverages the power of your network to streamline fundraising, deal origination, and due diligence while providing you with the data you need to make better investments. To learn how 4Degrees can streamline your fundraising and deal sourcing process, Request a free demo today.

Private equity fundraising

Going Forward

This guide covers some of your primary considerations when raising private equity dollars. Use this advice to prepare yourself, but remember to be flexible and transparent with prospective limited partners.

Of course, they have their own goals and mandates that don’t always align with your strategy. However, if you and your team have a good reputation and present potential LPs with a well-thought-out and sound investment strategy, chances are you will have some good conversations with potential partners.

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