Provided by Leslie Cummins and Peter Tropper of the
International Finance Corporation
This section will help you to:
Take Stock
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Decide Which Investors You Plan to Target in Your Fundraising Effort
- Prefer a “club deal” or a Fund with a large (> 10) number of investors? A “club deal” is a Fund with a smaller number of Investors, which may encourage a more familiar atmosphere.
- Prefer Institutional or Retail High-Net-Worth Investors? Institutional Investors, such as CalPERS or TIAA-CREF, may have a dedicated professional staff and several billion dollars (U.S.) of exposure to Private Equity Funds. They may follow a prescribed series of investment processes and may report to a formal Board of Directors. Retail high-net-worth Investors may have less knowledge of Private Equity Funds, fewer formal investment processes, and no more than a few million dollars (U.S.) of exposure.
- Prefer Strategic or Financial Investors? Strategic Investors may be motivated by a desire to co-invest alongside the Fund, to source direct investments, or to increase their understanding of the Fund’s target market(s) in order to invest more aggressively there in the future. Financial Investors are motivated solely by the desire to achieve financial returns.
- Prefer Active or Passive Investors? Passive investors may not attend Investors’ meetings or following the Fund’s reporting attentively. They deploy their capital in professionally-managed Funds and focus their attention elsewhere. Active Investors attend Investors’ and Advisory Committee meetings, may co-invest alongside the Fund, and may visit the Fund’s investees, inter alia.
- Prefer High or Low profile Investors? High profile investors appear frequently in the media and may take controversial stands on various issues. Low profile investors are likely to be anonymous or quiet vis-à-vis the larger marketplace.
- Prefer Public or Private Sector Investors, or Quasi-Public (e.g. multilaterals)? Private and public sector investors may differ in their internal investment processes, their decision-making authorities (e.g. Board or no Board), their allocation preferences, and their profile.
- Prefer Investors investing directly or only indirectly in Private Equity Funds? Indirect Investors will never be in competition with you for direct investments in your target markets. Investors which invest both directly and indirectly may compete with you at some level.
- Prefer Commercial or Developmental Investors? Developmental investors, such as IFC, are motivated at least in part by the desire to achieve a developmental impact through their investments. Commercial investors are usually indifferent to developmental impact; they are motivated solely by the desire to achieve financial returns.
- Prefer Investors with broad, general preferences or narrow, specific preferences? Investors with broad, general preferences may consider investing in a broader range of fund foci than others. However, they may still be very selective in terms of their minimum Internal Rate of Return (“IRR”) expectations.
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Get to Know Your Targeted Investors
- Conduct information interviews and reference checks to better understand their preferences and restrictions, including tax considerations
- Familiarize yourself with their portfolios and allocation strategies
- If you are targeting specialized areas, determine in advance which Investors have a demonstrated appetite for these areas
- To learn more, read excerpts from the Alternative Investing 2001 Goldman Sachs & Frank Russell report about Investor types worldwide.
- Be prepared to spend time educating your targeted Investors. They may need your help to understand (i) emerging markets and/or the particular markets where your Fund would invest; (ii) Private Equity Funds; (iii) Small and Medium-Sized Enterprises (“SMEs”) or any other specialized investment types in which your Fund would invest; and (iv) your team and its competitive advantages.
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Understand the Main Investor Types
- Endowments – For instance, of large private universities (Harvard, Yale). Often, external consultants known as gatekeepers may advise them in Fund investment. Tax-exempt.
- Foundations – For instance, the MacArthur Foundation. Philanthropic in nature. Funded by families. Invest to fund the objectives of the foundation. May be advised by external consultants. Tax exempt.
- Family Trusts – High net worth individuals investing via a trust for tax reasons. May be advised by external consultants. May not be tax exempt.
- U.S. State Pension Plans – State employee plans: (i) teachers; (ii) municipal employees; (iii) other public sector employees. Regulated by state law. Follow ERISA standards for quality. (e.g. CalPERS). May work with “gatekeeper” fund managers and/or consultants. Tax exempt.
- Corporate Pension Plans – For instance, Johnson & Johnson, General Motors, Lockheed Martin. Follow ERISA. May not be tax exempt.
- Banks – Investment in alternative assets may be motivated by: (i) underwriting business generated from the relationship with the Fund Manager; (ii) Fund Manager a subsidiary of the bank in question (JP Morgan, CSFB). Not tax exempt.
- Insurance & Pensions (Contractual Savings Institutions) - Allocation to alternative assets may be limited or prohibited by regulations. Not tax exempt. Appeal is the long life of the asset class.
- Mutual Funds/Unit Trusts - Allocation to Private Equity Funds and other alternative assets may be limited or prohibited by regulations. Not tax exempt, but may be tax pass through.
- International Financial Institutions (IFIs) – May invest in Private Equity Funds for developmental and social purposes. Download this list of IFIs to learn more.
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Understand How Investor Allocation Preferences May Vary and Why
- Returns – Investors may establish a minimum Internal Rate of Return (IRR) threshold
- Liquidity – Investors may have liquidity preferences, e.g. Fund life can be no longer than 10 years, or known existence of a secondary market for Investor positions in Funds of that nature
- Term Sheet – Investors may prefer negotiable terms
- Legal Form – Investors may prefer a particular legal form (e.g. Partnership, Limited Liability Company, Trust) and a domicile (e.g. Cayman Island, Delaware). The preference is normally tax driven.
- Risk – Investors may prefer to decrease or increase country risk, depreciation risk, regulatory risk, and other kinds of risks
- Geography/Sector/Stage/Size – Investors may prefer to decrease or increase their exposure to certain countries, regions, industrial sectors, or stage-wise transaction types
- Asset types – Investors may prefer to decrease or increase their exposure to, for instance, later stage investing versus start-up companies
- Number of Fund Manager Relationships in Investor Portfolio – Investors may prefer to decrease or increase the number of Investor relationships in their portfolio for the risk profile in question
- Other Investors – Investors may seek to invest in Funds which attract or exclude certain types of Investors. These preferences may be driven by compatibility of interests, reputational risk, or risk of default.
- Investment Policies and Procedures – Investors may have preferences regarding Fund Manager accountability, internal checks and balances, reporting frequency, for instance.
- Opportunities for Strategic Investing – Investors may prefer a Fund Manager which offers co-investment rights
- Strong Social or Developmental Story - Some Investors may have a strong preference for Funds which are developmental in nature (e.g. preference for S.M.E.s).
- Environment – Investors may be prohibited from investing in a Fund which does not promote environmental and social policies and procedures of a specific nature in place. Learn more about IFC’s environmental and social policies and procedures.
- Allocation - Some Investors may be prohibited from taking exposure to certain geographical areas, investment stages, or industrial sectors.
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Anticipate Investor Due Diligence Processes
- Each Investor is unique; no two Investors have the same approach to Fund investing.
- Many Investors will follow a sequence of Investment Processes similar to those you plan to follow, prior to signing the Fund’s legal agreements. Some Investors may be transparent with you about these processes, while others may not.
- Investors will likely request:
- the Private Placement Memorandum (PPM) for your prospective Fund
- the draft legal agreements for your prospective Fund
- your standard “due diligence kit”
- a list of references for reference checks
- detailed portfolio and cash flow information concerning any prior investments you have made
- many other “bits and pieces” of information relevant to their investment processes
- Download this sample Investor Private Equity Fund Due Diligence Questionnaire to learn more typical Investor due diligence requests.
- Prospective Investors may visit and/or contact, inter alia, your offices, your existing portfolio companies, the Investors in any prior investment or Fund with which you may be associated, your auditors, and your prior employers. They may do so once or repeatedly.
- Investors may spend anywhere from a few weeks to several months on due diligence on prospective Fund Managers.
- Investors may request that you make a presentation to their internal Investment Committee or Board of Directors, in addition to their investment staff.
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