01 // The Keys to Success

Whilst evidence shows the case for first time funds is strong, there are some critical areas that need substantial thought well in advance of any fund being established.

Getting started
The keys to success

The key areas are summarised here:

/ Team

Investors will always look at the track record of the investment team before making an investment and generally won’t invest unless this is strong. Investors prefer a team that has demonstrated success working together on deals (indeed spin-outs from established firms can be very successful) but we occasionally see investors comfortable with a new investment team with their individual track records. Where they are unable to evidence track record, Emerging Managers will likely seek to go down the deal-deal route to help build a track record of investment.

/ Strategy

It is critical to have a well-defined strategy in place before speaking to investors. With an abundance of well-established fund managers holding well established investor relationships its important to offer “something different”. Many investors investing in first time funds do so to diversify their portfolio or establish new relationships but, as much as this, to focus on a niche strategy. It's important to stand out from the crowd, but to do so with authenticity in your strategy.

/ Infrastructure

Taking time to set the business up properly is important but must be timed well to avoid unnecessary costs too early on. Consideration must be given to setting up the infrastructure including for example: front-middle-back offices, recruitment, regulatory licences, IT, Compliance. A key consideration is also how much you want to outsource certain back-office functions – for a first time fund outsourcing can assist with keeping costs down.

Whilst evidence shows the case for first time funds is strong, there are some critical areas that need substantial thought well in advance of any fund being established.

It is important at the outset to discuss the medium term with a new GP, for example likely carry arrangements for future joiners, the pipeline of investors and the likely size of future funds. We will always try to create a structure that is as future proof as possible.

// Daniel Greenaway, Partner, K&L Gates

/ Investors

Building investor relationships as early as possible in the process is critical. Track record aside many investors will want to understand who else is investing in the fund so it’s helpful to have the backing of a cornerstone investor that might attract others. The investor due diligence process shouldn’t be underestimated and will take a significant amount of time so that must be factored into the timeline. Strong consideration should be given to the use of placement agents.

/ Infrastructure

/ Investments

Clearly it's important to build a pipeline of investments and be able to talk to investors about the same.

There is sometimes a preference to get the structure in final form before presenting to investors, but I often suggest it is left out of the initial fund deck. It can be an unnecessary distraction and ultimately it is good to have some degree of flexibility in order to fit with the preferences of key investors.

// Daniel Greenaway, Partner, K&L Gates