Fundraising Guidance for GPs and MDs Based on Fund Size

Here’s my overall take on Sameer’s post, and how GPs and MDs of each size fund should handle this type of guidance, in fundraising. For 70+ hours of fundraising help, go to lpblueprint.com.

1. Small-Cap Funds (<$250MM)

Fundraising Challenges:

• Access to LPs: LPs may perceive these funds as higher risk due to smaller fund sizes and less predictable return patterns. Post-2020 vintages have demonstrated mixed results. Funds raised in 2021 and 2022 have faced significant challenges due to overvaluation during the funding boom and subsequent market corrections.

• Manager Dependence: Success hinges on the GP’s reputation, track record, and ability to demonstrate a unique edge (e.g., sector focus or sourcing strategy).

• Liquidity Concerns: Longer time horizons to exits can deter LPs with tighter liquidity requirements. (i.e. if GP does not have 2.2% of fund total cash up front, fundraise is generally not viable)

Fundraising Strategies:

• Highlight Exceptional Manager Track Records: LPs want to know the GP can consistently source and back outlier companies.

• Demonstrate Clear Differentiation: Whether it's a sector specialty or unique sourcing strategy, articulate competitive edge to LPs.

• Leverage Boutique LPs: Approach family offices and smaller institutional investors who may be more willing to bet on outsized returns from smaller funds.

2. Mid-Cap Funds ($250MM-$1B)

Fundraising Challenges:

• Positioning Against Large Funds: LPs often compare mid-cap funds with large-cap platforms, requiring GPs to justify their focus/scope.

• Ownership Targets and Clear Timeline Mandate: Mid-cap funds must demonstrate ability to secure meaningful ownership stakes in competitive funding rounds. GPs/MDs must demonstrate clear timeline to close to LPs.

Fundraising Strategies:

• Sell the Balanced Profile: Emphasize the mid-cap sweet spot, balancing upside potential and diversification with a more predictable return profile than small-cap funds.

• Highlight Scaled Operations: Showcase ops resources (e.g., portfolio support, in-house expertise) that appeal to LPs looking for more robust fund managers without red tape of large platforms.

• Target Pensions and Endowments: These LPs often seek consistent mid-teen IRRs and may find mid-cap funds appealing as a complement to small-cap and large-cap exposures.

3. Large-Cap Funds ($1B+)

Fundraising Challenges:

• Access vs. Differentiation: LPs need reasons to choose your fund over other large-cap platforms with similar deal access.

• Dilution of Returns: LPs often associate larger fund sizes with lower potential for outsized returns. When was the last time your fund produced an outsized return? Why did it happen?

Fundraising Strategies:

• Leverage Brand and Network: Large funds rely on brand recognition and proven deal access to stand out. Build relationships with LPs long before fundraising starts.

• Showcase Full Lifecycle Investing: Emphasize your ability to support companies from seed to growth stages, reducing LP exposure to gaps in the funding lifecycle.

• Appeal to Institutions Seeking Reliability: Position yourself as a safe bet for LPs looking for consistent returns and lower risk.

General Fundraising Tips Across Fund Sizes

1. Tailor Messaging to LP Profiles:

   • Where is your wealth preservation messaging on your website? Do you have a comprehensive and well-developed framework for communicating your approach to wealth preservation? What are the three to four key pillars of your messaging strategy?

   • Family Offices: Emphasize flexibility, high-touch relationships, and potential outsized returns (ideal for small-cap funds).

   • Institutional Investors: Focus on predictable performance metrics and scalable investment processes (appealing for mid-cap and large-cap funds).

   • Endowments/Pensions: Highlight diversification benefits and risk-adjusted returns, offering a complementary strategy to existing private market exposures.

2. Quantify the Edge:

   • Back up differentiation claims with data (e.g., sourcing funnel stats, historical IRRs/TVPIs, portfolio concentration).

3. Prepare for LP Diligence:

   • Institutional LPs are increasingly sophisticated, often requesting detailed portfolio construction models and scenarios for performance across market cycles.

4. Integrate Storytelling:

   • Fundraising is often a narrative-driven exercise. Highlight past success stories to demonstrate how your approach aligns with the fund’s target profile. Research shows that recall is 22 times more likely when information is delivered through a story (cognitive psychologist Jerome Bruner, Actual Minds, Possible Worlds) compared to just facts alone, making compelling storytelling a critical tool for engaging LPs.

5. Engage Early and Build Relationships:

   • Start cultivating LP relationships years before a raise. Focus on demonstrating value and reliability through consistent communication.

Fundraising Takeaway

Your fundraising strategy should align with your fund's size and investment focus. Whether you’re a small-cap fund touting outsized potential, a mid-cap fund offering balanced exposure, or a large-cap fund focused on reliability and access, ensure your LP-facing narrative is clear, data-backed, and compelling.