Capital raising strategy, placement agents, and LP targeting
Fundraising for private equity funds represents one of the most consequential activities a manager undertakes. The capital raised determines fund size, which affects strategy execution, team economics, and competitive positioning. PE fundraising typically occurs in concentrated periods between fund vintages, requiring intensive effort to engage prospective LPs, conduct due diligence processes, and close commitments. Understanding the fundraising landscape, investor preferences, and operational requirements helps managers execute successful capital raises.
PE fundraising campaigns typically span 12 to 24 months, though timing varies based on market conditions, manager track record, and fund size. The process generally begins with preparation activities including track record compilation, marketing material development, and data room construction. Initial outreach targets existing LPs for re-up discussions alongside prospective investors identified through research and relationship networks.
Most fundraises involve a first close that establishes the fund and allows investment activity to begin, followed by subsequent closes that bring in additional LPs. First closes often target 30% to 50% of the fund target, demonstrating momentum to prospective investors. Subsequent close investors typically pay equalization interest that compensates earlier investors for capital deployed prior to their commitment.
Investor due diligence processes have become more extensive and standardized. Institutional LPs typically conduct investment due diligence evaluating strategy, track record, team, and market opportunity, alongside operational due diligence examining compliance, cybersecurity, business continuity, and back-office capabilities. The DDQ and ODD processes can extend several months for larger commitments.
Many PE managers engage placement agents to assist with fundraising. Placement agents provide access to institutional investors, market intelligence, and fundraising process management. Agent fees typically range from 1% to 2% of capital raised, sometimes with graduated rates for larger commitments or reduced fees for existing relationships.
Selecting a placement agent involves evaluating their LP relationships, experience with similar funds, team continuity, and fee structure. Exclusive arrangements require careful consideration of agent capabilities and commitment. Some managers use multiple agents with geographic or investor-type specialization, while others conduct fundraising in-house with internal investor relations resources.
Placement agent disclosure requirements apply to investments by many public pension funds. Managers should understand which LPs require agent disclosure and ensure compliance with applicable pay-to-play rules and disclosure obligations.
Institutional investor types include public pension funds, corporate pension plans, endowments, foundations, sovereign wealth funds, insurance companies, and family offices. Each investor type has distinct characteristics, including investment horizons, liquidity needs, governance processes, and return expectations. Effective targeting considers which investor types align with fund strategy and terms.
Geographic diversification in the LP base provides stability and potentially different re-up cycles. However, non-U.S. investors may require structural accommodations such as parallel funds or blocker entities. Building a diversified LP base balances administrative complexity against concentration risk and re-up timing.
Performance presentation in fundraising materials requires careful attention to accuracy, consistency, and compliance. GIPS standards provide guidelines for performance presentation, though not all PE managers claim GIPS compliance. Key considerations include gross versus net returns, treatment of unrealized investments, attribution methodology, and appropriate benchmark comparisons.
Deal-level attribution helps LPs understand performance drivers and assess team capabilities. Loss deals deserve transparent discussion, as attempts to obscure poor outcomes typically emerge during due diligence and damage credibility. Presenting a balanced track record with honest assessment of successes and challenges often resonates better than selective performance presentation.
Fund terms have standardized considerably, but meaningful variation exists in areas including management fees, carried interest rates, preferred return hurdles, key person provisions, and GP commitment levels. Understanding market terms helps managers set competitive structures while preserving economics necessary for team retention and firm sustainability.
The Institutional Limited Partners Association (ILPA) has published principles and templates that influence LP expectations around terms, reporting, and governance. While not universally adopted, ILPA guidance shapes discussions around fee structures, alignment of interests, and transparency. Managers should understand ILPA recommendations and be prepared to discuss their approach to key provisions.
Fundraising in challenging markets requires adjusted expectations and potentially modified timelines. Market downturns often extend fundraising periods and may require fund size reductions. Maintaining LP relationships through difficult periods, even when not actively fundraising, positions managers for future capital raises.