First-time fund managers: Essential operational considerations
During Q1 2023, PE (“Private Equity”) emerging managers—defined as those who have raised less than three funds—had only raised $14.6 billion in equity commitments, while experienced firms took in $82.5 billion, or about 85% of all capital raised by PE funds, according to PitchBook data.
Uncertain conditions are driving a ‘flight to familiarity’ whereby LPs (“Limited Partnership”) are more comfortable investing with established names with a long track record of performance throughout market cycles. As a result, according to the Pitchbook data, only 160 first-time funds were raised in the first half of 2023 totaling just $22.3bn, down from 740 raising $59.2bn in 2022.
We believe first-time and emerging fund managers can reassure potential LPs about their institutional nature by embedding robust operational structures and processes from day one. So, what are the key considerations for first-time and emerging fund managers when developing or refining their operational teams?
Managers who are early in their lifecycle, in addition to having the relevant investment acumen for their target markets, need to ensure that they have a solid operational and financial team in place ahead of launch. Many of those functions can be outsourced to established service providers, reducing the need for an expensive and fixed internal team, typically reporting to the office of the CFO.
A CFO with experience in fund/partnership accounting is perhaps the most critical hire for a newer manager. Expertise in tax matters related to fund structuring and investment structuring will also be key to realizing the maximum value over time for the General Partners (“GP”) investments. In addition, there will need to be staff dedicated to providing the critical investor reporting and accounting reconciliations that happen throughout a fund’s lifecycle. This can place a huge burden on the CFO, and they need a strong service partner to support them as the manager develops and scales their infrastructure. At Apex Group we focus on being that trusted partner for the CFO, COO or Head of Operations, whereby, we grow with the manager supporting them with technology-enabled solutions through all stages of their lifecycle.
The expectations LPs hold for their GPs’ operation have changed as the private market assets classes have matured and become more sophisticated. The expectations that LPs have around the level of infrastructure their managers will have in place have increased significantly over the past five years as operational due diligence models have honed in on the optimal setup for managers.
For all but the largest of GPs, LPs will expect managers to have an institutional quality third party providing oversight over some of the key financial aspects of their investee GPs’ funds. They will expect a financially sound and reputable custodian for the fund’s liquid assets and cash, a strong back/middle office service provider, such as Apex Group, who can augment the internal team and provide global coverage for the managers’ needs, and a well-developed compliance program to ensure that the manager is meeting their obligations to the LPs as well as to their regulators.
For the manager’s in-house team who are not focused on sales or investing, having the right blend of operational and financial expertise in that back/middle office team can be the key to a smooth and well-functioning fund experience for their LPs. In conjunction, having a service provider who can step in and help enable the team’s success should be a key focus. At Apex Group, we focus on providing a turnkey solution to managers so that they can access all the services they require through a single relationship, delivering significant cost and time savings. With a robust range of solutions spanning GP accounting, fund administration, tax advisory, investor onboarding and a host of other needed areas of expertise, we are able to ensure a smooth experience for both the LPs and the GP.
A popular saying in the industry is that “you can outsource the responsibility, but you cannot outsource the liability.” As such, fund managers will, as appropriate, look to bring on service providers to help with their accounting, regulatory, and reporting architecture. A key aspect of the diligence that needs to be done on outsourced providers is related to their scope of services. When appointing a service provider, there are a number of questions which a new manager should ask themselves: Is the selected party large enough, with enough global coverage, to ensure I can be reassured that they can meet my needs -both now and in the future? Do they have a focus on technology that can help not only my life easier, but also the lives of my team and my LPs? Are they financially sound enough that I can rely upon them for appropriate staffing and support?
These are the key questions that CFOs and Ops Heads need to be asking themselves as they prepare to attract institutional capital to successfully launch their first fund.
To find out more, please contact the team.
