Raising Private Equity Funds for a Rainy Day

There is a “get it while you can” trend happening in private equity. Here is what you need to know.

You are aware that you need a “rainy day” fund for your personal finances. And you also likely have one for your business. But there is a growing trend in the alternative asset management world that is applying that mentality to fundraising. 

The economy has been humming along nicely, but for the first time since 2008, the Federal Reserve is expected to cut rates on July 31st. Although it might appear that the economy in the U.S. is thriving, there have been concerns over current trades, which may tie into a slowing global economy. Weathering just a few bumps in the road over the past couple of years, investors, asset managers, and analysts are starting to ask themselves: How much longer can this last?

Those of us who experienced the dotcom bubble, and then the Great Recession, the question lingers not as a passing muse, but rather a warning light in the back of our minds. 

Smart private equity and fund management firms are using this time of plenty to get ahead of the ballgame. As Chris Witkowsky at PE Hub puts it, they’re stashing cash “under the proverbial mattress”.

Private equity closing huge funding rounds

Big name firms like Advent and Blackstone have closed huge funding rounds this year. Advent reported closing $17.5 billion on its hard cap, posting $1.5 billion above the firm’s $16 billion goal. Meanwhile, Blackstone reported $22 billion in its latest round earlier this spring. 

The interesting trend is that many fund managers are electing to save these funds for future investments. They are also coming back for more fundraising sooner than expected, dipping back into the pool to emasse a greater stash. And since they don’t start charging fees until those funds are dispersed, LPs are mostly happy to oblige.

Has fundraising peaked?

Of course, there is no way to know when we’ve hit the peak of this trend.

Some analysts argue that we’re in it now, while others predict plenty of potential for the near future. What all seem to be able to agree on is that now is the time for fund managers to get what they can while the getting is good. Whether they’re going to use the funds now or save them for a later date when the market is less favorable, now is the time to build as much as possible.

Perhaps more importantly, smart PE firms are putting more effort into planning for an eventual downturn. As the U.S. and global economy steams into one of its longest running expansion periods, many are predicting a slow down in the near future. Managers are looking at the data and learning from the mistakes and successes of the last recession to help them plan ahead with investments in recession-resistant industries. 

What does all this mean for your firm?

The data seems to suggest that what all this means for you has a lot to do with the size of your private equity firm and the amount of capital it manages. Smaller firms are getting a bit more pinched, as the “big guys” are going out to raise more funds faster than before, are successfully capturing a big share of the capital, and then are stashing it away for a later date.

But for a private equity firm of any size, building relationships and data management are key to competitive advantage. Those that have modernized their fundraising and communication processes are experiencing better results overall.

“It helps us to look at our data in a different way. We had been looking at a very high level and now we are able to break it down and be more specific. We have more accurate and more meaningful data — we can see everything more real-time. We are a lot more efficient,” explains one private equity VP

Integrating a data management and/or CRM system built for private equity firms will not only provide your team with a competitive advantage now—while the market is hot. It will also pay dividends into the future in improved decision making, more efficient use of time and data, LP satisfaction, and more.

Is it time to upgrade your fundraising process? Learn how integrating with AIM can give you the boost your firm needs.

A traditional crm was built for general ‘customer’ scenarios

Software platforms have made the world a better place by making work a better place. Indeed the world is better off when people enjoy their jobs even marginally more, and workplace applications on big CRM platforms like Salesforce.com have done that and much more.

But the potential that platforms like these offer presents diminishing returns: once the platform provider has engineered too many industry specific components into its platform, its usefulness for other industries begins to be threatened, and with that so do the usefulness of the component tools built into the platform.

So it is with the CRM category that Salesforce.com has defined: it is generic enough to work for many industries, and yet still offers the potential for others to round off the edges and nail more vertically-oriented and extremely tailored software solutions.

Private capital markets are actually a great demonstration of this dynamic. Where generic CRM platforms simplify — appropriately so — to assume there’s a business, a customer, a sale, and service of that customer, there are a few industry-specific pieces that are missing.

Take for example, that investors become customers by investing through legal entities the GP raises. It’s a subtle but important nuance that just doesn’t make sense at a platform-as-a-service level (because it’s overly complicated for a simple one-time sale that many industries require), but which can easily be added without 10 years or software engineering. Once provided, the rest of the platform’s components become tremendously powerful again and you’re set to take over the world.

As a traditional CRM in our pillars methodology, these nuances must be present to properly account for investors in these legal entities, potential target companies and which are owned by these entities, the context of all interactions with these parties (as well as the appropriate overlap, ie co-investments), and how you’re arriving at finding these opportunities on both sides of the equation, such that you’re able to piece together what’s effective and what’s not. Not just because we say so, but because these are the very relationships and data that are key to the motivation behind a CRM in any industry.

It’s critical, too, that the valuable publicly-available information that helps to enrich CRM systems and save users painful steps of entering it themselves is fully-integrated at the platform level.

Again, look no further than the 3,000+ pre-built integrations that Salesforce.com — the creator of the CRM platform concept — has at a platform level to do so, and which only exists by way of holding just short of overly-specifying certain industry workflows that would present challenges to properly integrate.

Stakeholder reporting and communication (investor relations) draws on a range of datasets

The traditional “customer service” model of CRM systems once again makes overly-simplified assumptions about the customer relationship when applied to private capital markets.

In fifteen years I personally have yet to hear the terms “warranty” or “service call” in this market because it’s just not the same. But make no mistake, as uncomfortable as it may be to say aloud, customer service is more important now than ever and it’s constantly happening; the industry is, after all, considered to be a financial “service”.

As it turns out, that service is primarily information-based — it’s driven by data and takes the form of reports and analysis that drive decisions, and then end up again in investor-facing reports and analysis.

The foundational elements of a private capital markets CRM must be built such that they accommodate this data (like we discussed above), but so too that it can accommodate additional supporting data that investors (customers!) need in the context of service.

Oftentimes this supporting data — financial metrics and time-based values, for example — is believed not to meet the traditional definition of CRM and the natural thought is “well, better do this in Excel!”.

While I happen to believe Excel is still the greatest software application ever built, its introduction to this value chain we’ve discussed herein actually creates the problem many firms suffer from: key data needed to provide customer service (again: effectively the entirety of a firm’s reports and analysis) is now in disparate systems and detached.

Both of those dynamics are important and distinct: not only is this supplemental data disparate, but when brought together there is no logical association that can be made between the two data sets.

Allow me, then, to make the point very simply: not only can this financial and time-based value data (you may be thinking about is as “portfolio monitoring” or “accounting”) be a part of a CRM, it is arguably the most important part of a CRM because it’s at the core of what providing service to the customer entails — information that comes out of data!

Firms need a digital method to engage stakeholders (ie investor portals)

Investor portals are not new; in fact, for many of us — including myself — they conjure up horrifying nightmares in which we’re aimlessly guessing at folders to find the newest document we need.

So in lies the opportunity: not only have the portals we’ve come to hate not simplified the process of acquiring information, they’ve failed to create an entirely new experience that is “customer service” driven.

To be fair, this is not a B2C market where you’d be long out of business for not having focused on customer service and thus the customer’s technology-driven experience. But don’t expect to be around too much longer if you aren’t thinking about this shift.

Today’s institutional investors increasingly expect this same consumer-like experience, and a massive opportunity is being missed by not providing it. It’s not about providing them the experience they desire; it’s more about the ability to measure engagement that is had in return.

Put simply: what’s keeping the market from providing this experience is the availability of the information that’s required to create the service that provides the experience.

If you’ve hung in this long, you know that by focusing on your CRM, you have the data that’s required to manage the customer relationship and the technology-driven experience through which that information is shared to create a differentiated and opportunistic customer experience.