Raising a fund as a first-time manager can feel like fighting for the last slice of pie at Thanksgiving dinner. The competition is fierce, and the odds often favor the established players. Yet, first-time funds are critical to the investment landscape- they drive innovation, uncover new opportunities, and have often been shown to deliver strong returns.
But how do investors decide to invest in first-time funds?
If you’re an emerging manager fighting for a slice of an LP’s portfolio, understanding the mindset of investors is critical. In this blog we explore what LPs (limited partners) look for when considering first-time funds and provide actionable tips to secure their support.
Why first-time funds matter to LPs?
First-time funds may be perceived as risky, but they also come with unique advantages:
- Access to innovation: Emerging managers often specialize in underrepresented sectors or geographies, providing LPs with access to untapped opportunities.
- Potential for outsized returns: Data from Cambridge Associates shows that first-time funds frequently rank among the top-performing funds.
- Customization opportunities: LPs investing early in a fund’s lifecycle often enjoy the chance to influence strategy and terms, creating a win-win partnership.
The key for emerging managers is to convince LPs that their fund’s potential outweighs the perceived risks.
What investors look for in first-time funds?
When LPs evaluate first-time funds, they are particularly focused on certain factors:
1. Differentiation
In a crowded market, standing out is critical. LPs want to know:
- What makes your fund unique?
- Is it your investment thesis, your sector expertise, or your approach to deal sourcing?
- How does your strategy fill a gap?
Show how your fund addresses unmet needs in the market.
2. Track record
While first-time managers may not have a fund-specific track record, LPs want to see evidence of prior success. This could include:
- Individual deal performance in previous roles.
- Expertise in a specific sector or strategy.
- An ability to source and execute high-quality investments.
Even without a formal track record, showcasing your achievements and expertise can help build confidence.
3. Team and leadership
LPs invest in people. They want to see a strong, experienced team that complements the manager’s vision. Key factors include:
- Alignment of skills within the team.
- Demonstrated leadership and decision-making capabilities.
- A clear understanding of the fund’s mission and strategy.
4. Relationship and trust
Building a first-time fund is as much about relationships as it is about returns. LPs prioritize managers they trust and feel connected to. Creating authentic, long-term relationships with potential investors is essential.
5. Alignment with investment goals
LPs want to know that your fund aligns with their broader portfolio objectives. This includes:
- Matching ticket sizes to their typical investment range.
- Ensuring your fund strategy aligns with their areas of focus (e.g., geography, sector, or risk appetite).
Why LPs hesitate with first-time funds?
Despite their potential, first-time funds come with perceived risks that LPs may hesitate to take on. Common concerns include:
- Lack of a proven track record.
- Uncertainty around the manager’s ability to scale operations.
- Limited familiarity with the manager’s target sector or geography.
Emerging managers need to address these concerns proactively, turning potential roadblocks into opportunities for trust-building and education.
How to attract Investors to your first-time fund?
Securing LP support requires a strategic approach. Here are key steps to take:
1. Build relationships early
Investors often take months, or even years to decide to invest in a first-time fund. Start building relationships early to lay the groundwork for future commitments.
2. Showcase your expertise
Even without a formal track record, highlight your expertise through:
- Thought leadership (e.g., publishing insights, speaking at conferences).
- Case studies of past successes.
- Demonstrating a deep understanding of your market and sector.
3. Tailor your pitch to each LP
Understanding each LP’s goals and priorities is crucial. Customize your pitch to show how your fund aligns with their objectives.
4. Be transparent
Transparency builds trust. Share not only your strengths but also your challenges, and most importantly, how you plan to manage them. LPs appreciate managers who are upfront about risks and limitations.
5. Leverage references
Recommendations from respected industry peers or previous colleagues can add credibility to your pitch.
6. Target the right LPs
Focus on LPs with a history of investing in first-time funds. These investors are more likely to understand the value and challenges of working with emerging managers.
Tips for Emerging Managers
1. Stay top of mind
Fundraising cycles can be long. Regular updates and meaningful touchpoints keep you on an LP’s radar and show your progress over time.
2. Tell your story
Your personal story and vision are your biggest assets. Use them to connect with LPs on a deeper level.
3. Educate LPs
If your target LPs are unfamiliar with your sector or geography, take the time to educate them. Provide data, case studies, and success stories that illustrate the opportunity.
4. Play the long game
Raising a fund is a marathon, not a sprint. Focus on building authentic relationships that extend beyond the immediate fundraising cycle.
The opportunity for first-time funds
First-time funds may face significant challenges, but they also represent a unique opportunity for LPs seeking innovation, diversification, and outsized returns. By focusing on relationship-building, differentiation, and alignment, emerging managers can position themselves as attractive options for investors.
Investing in first-time funds isn’t just about taking a chance, it’s about unlocking new possibilities for growth and success.
Ready to build the relationships that matter most for your fund? Let’s make it happen. Contact us to schedule an exploratory meeting. Contact us.