Private Equity
Private equity is different from real estate where investors buy commercial and residential properties to then sell for a profit after a few short years. Instead, private equity invests in large businesses. This can lead to an increase in investment returns since the profits generated by the business are spread out over all investors who have invested in the fund. This is what makes the business so lucrative for private equity companies that earn profits from their fund management fee as well as carried interest and a portion of each deal’s profits.
As new managers join the market, they have an uphill struggle to raise funds that are fully funded as LPs have been concerned about their performance and have trimmed their allocations. However, a successful fundraising effort depends on preparation and planning. Before setting out on the road, GPs need to know what they need to do to reach their goals of capital committed. Fundraising is an art of momentum. They should also have clarity on what sweeteners they are willing to offer such as scale discounts or first-mover discounts, so-called early bird benefits.
Many PE firms employ placement agents to connect with LPs, and promote their funds. They are compensated through a fee that is set by negotiation based on the total amount of money raised by the fund. Therefore, it is important for GPs to evaluate their internal investor relations team’s capabilities before enlisting the help of an agent to place the fund.