Loud and Clear -December 2018

A Fund’s Right to Exist – Part I: The Goldilocks Principle

 

Last month I shared a simple to use framework for presenting the highlights of your private equity or venture capital fund: POISE – Four Easy Steps to Pitching Your Fund. In that piece, I tried to show the effectiveness of clearly setting out the Purpose of your fund, the Opportunity it addresses and how the Investment Strategy captures that opportunity, before providing Evidence that you can execute.

Of course, it’s one thing to understand what to talk about, quite another to master how to say it. So, I am now going to touch on a few ideas that I always keep in mind, when drafting investor-facing materials. In essence, my aim in these next three articles is to help you convince investors that you have a “right to exist”.

A “right to exist”. What does that really mean? Many confuse it with the notion of having a “reason to exist”. Whilst the latter is important, the former is the less forgiving test. Having a reason to exist – a purpose – is an important element of any fund’s proposition, but it is not enough. An investor will almost always be faced with alternatives when evaluating the opportunity to invest in your fund. And investors are time-poor. The responsibility lies with you to demonstrate that your fund has a right to exist in the eyes of your potential investors. This means showing that your fund and its investment strategy are:

  1. Relevant and exceptional (the Goldilocks Principle)
  2. Repeatable and exclusive (the Manager’s Paradox)
  3. Righteous and effective (the Pragmatist’s Manifesto)

So how can you do this?

Firstly, you must make very clear that your proposition is both relevant and exceptional – but you must get the balance right. The Goldilocks principle applies: too “cold”, and your fund won’t be sufficiently appealing; too “hot” and investors will hold back, for fear of getting burnt.

Showing that your fund is Relevant

It must be clear that your fund will:

  • Meet the investment criteria (and fit neatly in a bucket, ideally)
  • Help the investor satisfy their responsibilities and achieve their targets

Ideally, and especially if this is a new fund, you will create a sense of “familiarity” in the investor, subtly exhibiting a limited number of attractive qualities of successful funds.

But be warned: make your fund too familiar and you risk presenting a fund with no personality. Funds with no personality just don’t stand out and rarely attract investor commitments.

Showing that your fund is Exceptional

What’s the best way to stand out? Showcase how your fund is Exceptional.

Your job is to show that your fund is:

  • Genuinely different (in an authentic and tangible manner)
  • “Better” in some measurable way than those other funds competing with you for investor dollars

But, just as there is such a thing as “too relevant”, managers must guard against the impulse to be too different: you must remain relevant, and investors must feel that they have the tools to assess the likelihood of your success. They may well feel more equipped to evaluate a 10-year Nordic mid-market buyout fund with a focus on business services than a 15-year Cuban renewable energy venture play. Sure, you’re different – but you’re also going to be broke, pretty quickly…

In a way, demonstrating relevance is a fund manager’s ticket to the Royal Ball, but only those in the most exceptional gowns get to dance with the Prince.

Next time, we will leave the question of compatibility and differentiation (but keen readers can find more thoughts on that subject, here) and turn to the investment strategy of the fund and what I like to call “the Manager’s paradox”: How can an investment and value creation strategy be shown to be repeatable (such that it can be employed with good prospects for success throughout the lifetime of the fund) and yet also exclusive (such that it cannot be copied by others in the market)?

The answer lies with the team – but more of that, next time.


If you would like help developing your brand or positioning your firm, please contact Matthew Craig-Greene using the contact details below.