The private equity (PE) fundraising landscape, historically dynamic and competitive, has become increasingly challenging in recent years. As a number of funds compete for limited investor capital, a consistent question we get as fund formation lawyers is: 'How have successful asset manager clients secured capital in this crowded market'?
Below we explore key strategic innovations managers utilise to navigate the fundraising process optimally, differentiate themselves from competitors and succeed in this challenging yet rewarding landscape.
Master the market: Fundraising success starts with in-depth market knowledge
Fund managers who prioritise potential investors based on their investment preferences, risk tolerance, and geographical focus tend to outperform those who apply a generalised approach. A tailored fundraising approach enables managers to raise capital, source deals, and create value effectively by leveraging their track records, regional expertise and networks to secure capital from investors.
Crafting clarity: A solid investment thesis unlocks investor interest
A clearly articulated investment thesis is essential to attract investors. Fund managers who proficiently outline their investment strategy, target markets, asset classes, investment approach and expected returns, backed by data-driven insights are more likely to secure meaningful anchor investment, which often act as a catalyst for further investment.
Rather than attempting to be 'everything to everyone', successful managers focus on presenting a targeted investment thesis aligned with their core strengths. They generally commit to their strategy and thesis, avoiding the temptation to revise this based on distinct investor demands out of desperation to secure capital. The goal is to convince investors that the fund's strategy aligns with their objectives and adheres to legal and structuring standards, terms and market norms. In the current fundraising environment, funds with a strong unique selling proposition (USP) are rewarded. Savvy fund managers leverage potential challenges as USPs rather than viewing them as obstacles.
Forge strategic connections
Fund managers with solid track records often cultivate lasting industry relationships through personalised communication and proactive investor engagement. Invariably, these managers tend to be more successful and more profitable. By leveraging these connections, fund managers access new investor subsets and expand their geographical reach. For example, the co-managing partner and founder of a South African emerging fund manager, facing challenges in raising capital, applied for an executive position at an international development finance institute (DFI). During the interview, this fund manager seized this unique opportunity to demonstrate their capability and expertise by discussing their fund. This bold and innovative move, combined with direct access to senior decision-makers, resulted in the DFI allocating capital to the fund, which then exceeded its target commitments at final close. This highlights the power of out-of-the-box thinking and leveraging relationships to raise capital.
Proven success: Leverage past investments to attract new capital
A strong track record of successful investments is one of the most persuasive tools in a fundraising campaign. Traditional investors are more likely to allocate capital to funds with proven success making and exiting investments. Successful fund managers highlight their past successes, particularly those that align with the current fund's strategy, which infers consistency and exemplary risk management. Case studies and testimonials from satisfied investors also serve as compelling inducements to invest for prospective investors.
Effective use of technology
Fund managers who embrace technology to streamline operations and efficiently deliver on investor expectations often establish themselves as thought leaders and build trust more effectively in the market. By focusing on innovation and automation, these managers deliver informative content and insights targeted at meeting investor requirements and set themselves apart from their nearest competitors. This approach is increasingly sought after by traditional investors such as DFI's who value and demand effective reporting and transparency.
Stay agile: Adapt to market conditions to maximise returns
Fund managers must remain agile and responsive to macroeconomic trends, regulatory developments and shifts in investor sentiment. By building adaptable teams, they can navigate these challenges and capitalise on emerging opportunities. Fund managers who have opted for consolidation in the past three years have extended their reach, strengthened their market positions, unlocked additional capital, and successfully navigated market fluctuations.
Align with demand: Investors expect impact without compromising returns
It is becoming increasingly important for fund managers launching funds to align with the demand of their investor audience and their investment focus. In the African context, European DFI's are increasingly preoccupied with impact investing. Offering flexible terms, like performance-based incentives, can also make a fund more attractive. DFI and pension fund investors are increasingly linking ESG metrics to carried interest. These innovative strategies make funds more appealing to investors seeking innovative ways to align their interests with those of the fund managers they invest with.
Build trust and unlock capital: The power of a strategic co-investment approach
Having a clear co-investment strategy can be highly beneficial. By offering co-investment opportunities, fund managers can access additional capital and help manage fund exposure limits. Emerging managers can collaborate with co-investors to pursue attractive opportunities, particularly in slower fundraising environments. This demonstrates their competitive edge and ability to make deals aligned with their investment strategy.
As managers seek new capital sources and investors look to reduce fees, co-investments have become increasingly common. All of the Africa-focused funds we have advised on recently, have implemented clear and concise co-investment strategies adapted to suit investor needs. Fund managers looking to attract traditional capital should adopt a flexible approach to co-investment opportunities and be open to accommodating investor requests.
Pitch for success: Combine strategy and legal clarity
In the age of information, fund managers are expected to provide comprehensive, clear and well-drafted documentation to prospective investors. The aim is to effectively convey the fund's strategy, competitive advantages, team credentials and track record, while also ensuring that the legal aspects such as disclaimers, jurisdictional warnings and risk factors are expressly provided for.
A robust due diligence questionnaire provides clarity, instils confidence and increases efficiency. By providing comprehensive information upfront, fund managers can increase their chances of raising capital. Additionally, prioritising the drafting of succinct and effectual term sheets can reduce the time and fees associated with subsequently concluding the substantive fund documents.
Trends shaping African investment: 2024 in review
Looking ahead to 2025, following a year characterised by elections across the continent and globally, the African PE landscape is expected to continue evolving. Increased attention will be placed on political stability, economic reforms, and sector-specific opportunities. We have identified key trends in this regard below.
Despite its challenges, Africa presents a compelling investment opportunity for PE investors who are willing to navigate the complexities on the continent, many of which are unique to Africa, together with an adept asset manager.
Fundraising for PE funds in Africa is a complex, challenging and competitive journey. It requires strategic planning, strong execution, a keen understanding of investor needs and the support of advisers who are well-versed in structuring funds on the continent. Asset managers who clearly articulate their value proposition, build trust with investors, and adapt to market trends will thrive in this increasingly competitive environment.
Importantly, a strong understanding of the African continent and its PE landscape and nuances remains invaluable for managers looking to raise capital for deployment on the continent. Strategic investments in high-growth sectors, coupled with a focus on sustainability and impact, are likely to shape the PE landscape in Africa moving forward into 2025 and beyond.
