Market volatility and geopolitical uncertainties have kept the private equity fundraising sentiment bleak in 2023. As a result, it’s even more crucial than ever to understand current market trends and LP expectations to successfully raise a fund.
Additionally, what LPs are looking for is effectively changing – funds now need to demonstrate a clear commitment to ESG and show they can actively help their portfolio companies succeed.
In this blog post, we’ll be going over what investors are looking for in detail. Read on if you want to find out the industry insights that help you know how to fundraise your PE or VC fund in 2023!
Since the Russian attack on Ukraine, we have seen fluctuating levels of market volatility caused by a lingering environment of geopolitical uncertainty. Funds around the world face challenges in valuing portfolio companies and making sound investment decisions in such an environment.
Moreover, the attack has also led to a slowdown in deal-making activity and exit opportunities. This has made it difficult for funds to demonstrate their ability to generate returns to LPs.
In addition, other geopolitical uncertainties such as trade tensions and political instability have added to the challenges faced by the private market industry. A strong example of this is the ongoing trade tensions between the US and China which have had a significant impact on both global market volatility and investor sentiment.
Despite these challenges, private markets have continued to grow and perform well, leading to increasing investor interest in alternative assets. A lack of performing public assets and more and more value being created by private companies makes it still an interesting asset class for many investors.
As a result, funds that can differentiate themselves by offering strong value propositions and demonstrating a clear commitment to ESG considerations are now much more likely to succeed in fundraising efforts.
Operational expertise has also become increasingly important for fund managers as a means of driving value creation. In the past, funds relied heavily on financial engineering to generate returns, such as leveraging portfolio companies or implementing cost-cutting measures.
But in the absence of cheap debt and rising costs, fund managers need to focus more heavily on operational improvements to generate returns. Fund managers now need to have a deep understanding of their portfolio companies and how they operate. They need to be able to identify and implement operational improvements that can lead to growth and increased profitability.
With that in mind, let’s have a look at what LPs expect from funds in 2023.
Understanding LP preferences is critical for launching a successful fund. Institutional investors have specific investment mandates and expectations for their investments – funds that are able to meet these expectations are more likely to attract and retain LPs.
Additionally, funds that truly understand LP preferences can tailor their approach to fundraising and differentiate themselves from their competitors in the market. They can also develop a targeted fundraising strategy that highlights their strengths and value proposition.
But what exactly are the factors that matter most to LPs? Let’s explore.
When it comes to private equity or venture capital fundraising, LPs look for experienced fund managers who can deliver strong returns for their investors. Two of the most important factors that matter to LPs are a fund's track record and team selection.
A track record of generating strong returns is critical for attracting and retaining LPs. LPs want to invest with fund managers who have a proven track record of generating returns that meet or exceed their expectations.
Therefore, funds that can demonstrate a history of generating attractive returns are more likely to attract LPs and differentiate themselves from their competitors.
When it comes to new funds that don’t yet have a track record, they need to focus on the personal achievements of the founding partners and other team members to demonstrate their competence.
Team selection is also a critical factor for LPs when evaluating funds. LPs want to invest with fund managers who have a strong team with the necessary experience to successfully execute their investment strategy.
This includes not only the investment team but also the support staff, such as legal, compliance, and operations professionals. A strong team can help funds identify and execute investment opportunities and show the capacity to generate returns for its investors.
LPs increasingly rely on digital touchpoints to evaluate funds during the fundraising process. That’s why a well-organized data room is a critical component of successfully raising a PE or VC fund. The data room should include key components like historical fund performance, investment team bios, and deal pipelines.
Additionally, LPs appreciate personalized touches like videos of CEOs, proof of collaboration among team members, and testimonials from satisfied partners. These elements can help LPs better understand the investment opportunity and evaluate the fund's strengths.
Need help in crafting your Data Room? Explore the Vestlane Data Room – a secure and organized platform for storing and sharing critical documents with potential investors. Easily manage and analyse investor activity, tailor your presentations and maximize your chances of securing investment.
In addition to a well-organized data room, funds need to develop a strong pitch deck that clearly articulates the investment thesis and value proposition of the fund. Want to find out more about how to create a successful pitch deck? Check out our full guide on crafting the perfect fund presentation to impress LPs.
Environmental, social, and governance (ESG) considerations play an increasingly important role in private capital fundraising. LPs are more and more demanding transparency and accountability around ESG issues, and funds need to demonstrate a clear commitment in order to attract and retain LPs.
Having a strong ESG strategy in place can help funds attract a wider pool of LPs and differentiate themselves from their competitors. LPs are becoming more selective in their investments and now often turn down alternative managers that do not meet their ESG standards.
During private equity and venture capital fundraising, LPs ask more and more ESG-related questions to better understand a fund's approach to responsible investing practices. Here are the top 5 ESG questions that LPs typically ask:
In today's market, fund managers need to focus more heavily on operational improvements to generate returns, particularly in the absence of cheap debt and rising valuations. 2023 has brought about a substantial shift towards operational expertise.
To succeed in this complex environment, fund managers need to have a deep understanding of their portfolio companies and how they operate. They need to be able to identify and implement operational improvements that can lead to growth and increased profitability. This requires a strong focus on areas such as supply chain management, marketing and sales, and technology adoption.
The shift towards operational expertise is driven by several factors, including the increasing competition in the private equity industry. With so many new funds being launched and capital readily available, funds need to do more than just add capital to their portfolio companies in order to outperform their peers.
In addition to developing a clear investment thesis, building a strong team, and communicating effectively with LPs, fund managers can hugely benefit from rewarding loyalty and developing creative fundraising strategies.
During slower fundraising markets, it's essential for fund managers to be patient and flexible in their fundraising strategy. It may take longer to raise capital and close deals during these times, and managers need to be prepared to adapt to changing market conditions and investor preferences. This means being open to adjusting timelines, revisiting fundraising targets, and reevaluating the marketing strategy as needed.
In a slower fundraising market, building strong relationships with potential investors is critical to success. Rather than solely focusing on pitching your fund, it's important to take the time to understand investor needs and preferences, their investment goals, and their current portfolio. This allows you to tailor your fundraising pitch and demonstrate how your fund can fit into their overall investment strategy.
Building relationships with investors involves ongoing communication, even outside the fundraising process. Additionally, engaging with potential investors on social media or attending industry events can help build rapport and establish credibility.
Raising a private equity fund is no easy feat, but what happens after you've secured commitments? Building and maintaining strong relationships with investors is essential for ensuring satisfaction.
LPs have high expectations when it comes to communication. They expect regular updates on fund performance, portfolio companies, and market trends. It's important for fund managers to set expectations early on and establish a clear communication plan that meets the needs and preferences of their LPs.
Effective LP communication can help address potential issues before they become major problems. Regular updates on fund performance and portfolio companies, as well as transparent and timely reporting on ESG considerations, can help build trust and demonstrate accountability.
LPs are often sophisticated investors with deep industry expertise and valuable insights into their niche. Effective LP communication can also lead to increased investor engagement and buy-in, critical during periods of market volatility or economic uncertainty
Despite the challenges posed by the current private capital fundraising market, the downturn can be seen as an opportunity for savvy fund managers. While the market is more competitive and LP expectations are higher than ever, there are opportunities to differentiate your fund and generate attractive returns.
Additionally, the current market conditions may present unique opportunities to invest in companies at lower valuations, potentially leading to greater long-term returns.
Fundraising sentiment is expected to be more challenging in 2023 due to market volatility and geopolitical uncertainties. However, there is still demand to access private markets through private equity, venture capital or real estate fund. Especially the growing interest of wealthy individuals can help you manage the tough market and successfully close your fund.
Fundraising for a private equity fund requires a strong understanding of market trends and LP expectations, as well as a differentiated investment strategy that addresses a specific market niche or opportunity. Developing a well-organized data room and pitch deck that clearly articulates the investment thesis and value proposition of the fund is critical for attracting and retaining LPs.
LPs typically look for funds with a strong track record, a talented and experienced team, and a well-defined investment thesis and value proposition. Other factors that may be important to LPs include a fund's approach to ESG considerations, the quality of the fund's data room and pitch deck, and the fund manager's ability to effectively communicate with investors.
Fund managers can demonstrate their commitment to ESG considerations by implementing strong ESG policies and practices across their portfolio companies, and by providing transparent and regular reporting on ESG performance. Additionally, fund managers can seek out ESG-focused LPs and incorporate ESG considerations into their pitch deck and investment thesis.
Some best practices for developing a pitch deck include keeping the presentation concise and visually appealing, clearly articulating the fund's investment thesis and value proposition, and providing detailed information on the fund's track record, team, and portfolio companies. Additionally, including case studies and testimonials can help demonstrate the fund's ability to deliver results.
Fund managers can add value through operational improvements by identifying cost savings opportunities, streamlining operations, and implementing new technologies that can lead to increased efficiency. Offering an outside perspective and sharing best practices from other portfolio companies can be of great help. With their expertise in M&A and Financial transactions, Fund Managers can also help to expand in new markets.
Fund managers can effectively communicate with LPs by providing regular updates on fund performance, portfolio companies, and market trends, and by demonstrating transparency and accountability in all communications. Additionally, building personal relationships with LPs and showing a genuine interest in their needs and expectations can help build long-term partnerships.
Fund managers can adapt their fundraising strategy by staying up-to-date on market trends and LP preferences, and by adjusting their pitch deck and investment thesis to align with these trends.
Fund managers can differentiate their funds by developing a unique and differentiated investment strategy that addresses a specific market niche or opportunity. Fund managers may also consider incorporating ESG considerations into their investment thesis, as LPs are increasingly prioritizing these factors.
