E158: How to Find the Right LPs for Your Next Fund w/Meghan Reynolds
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Is there a first mover advantage in asset management?
As a general rule, is there a huge first movers advantage in alternatives and asset management as a whole? That's a great question. I would imagine there is definitely a first mover advantage, but track record really will rule the day. There is a trail of tears. that exists in asset management with firms that were there very early that don't exist today, that they don't withstand the test of time because the track record's there. If you can look back in history, there were very large buyout firms that were some of the mega buyout firms that existed in 2005, 2006, 2007 that literally disbanded and don't exist today. When we last chatted, you mentioned this concept of a strategic investor. I always thought that that meant the investor with the most money in their bank account. What makes an investor strategic?
Capital can be flexible. It can be consistent. It can be flexible. scalable. Like that is very strategic. Or a capital that says, yes, you've been a $10 million investor to me and now I'm raising in a $100 million fund and I'm going to raise a billion dollar fund. That's super strategic. What is the difference between capital formation and investor relations? So in the simplest terms... Investor relations is everything to do with investors that are already on your platform. So working with your investors from an administrative standpoint, getting them everything they need to know from you once they are already invested in your products and your platform. Capital formation is primarily concerned with attracting and securing new commitments.
So that would be a sales process. That would be identifying new prospects and bringing in capital to ensure the funds that you're managing have what's necessary to pursue the investment strategies that you're trying to pursue. So tell me about how these investor strategies change over time. Investment strategies that affirm... is managing. may or may not change over time. But in a private market context, typically you're raising a fund every few years. You might, that fund, very few firms raise the same amount of capital every few years and just keep that consistent. I can think of maybe one or two that do that consistently and successfully. Most private funds, the fund sizes fluctuate. So you might increase the capital you're raising over time. You might form a new strategy. to pursue a new set of opportunities. You might expand into a new asset class. You're a private equity investor and you're going to expand into credit or you're going to expand into real estate and become a multi-product firm.
When your strategy or your funds change, whether you're increasing your fund size or you're pursuing a new strategy, the investors who were invested with you historically may not be the right investors for you going forward. And so you need to adapt that and identify, adapt your strategy as it relates to capital formation and identify who's the right capital for what you're pursuing today. So let's say you're a private equity fund or a venture capital fund that's looking to create a credit fund. Tell me about how you go about doing that. The folks that are your investors, right? They might be endowments, they might be pension plans, they might be high net worth investors. Most likely, if they're an institutional investor, the team that would pursue credit opportunities, like the actual people who decide, I am your champion, I want to invest in David's fund, are different than the people that would invest in credit strategies.
So you might have to go to, while it's the same parent investor, you may need to have a conversation with a whole new set of people, the credit teams. Yes, some organizations and some family offices or individuals is just one person making all decisions. But that's actually more rare when you're talking about institutional alternative investing. And so you need to identify who are the right people, even if they're my existing investors, who are the right people at an organization that could pursue this type of strategy. You also need to canvas the universe of investors to say, okay, who invests in credit? Where is capital being raised in credit? Who might be the right investors for my strategy?
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Chapters
4 chapters
1
Is there a first mover advantage in asset management?
0:00–11:58
2
What defines a strategic investor beyond capital size?
11:58–20:24
3
What is the difference between capital formation and investor relations?
20:24–35:28
4
How do investor strategies evolve over time and affect fundraising?
35:28–57:01
Speakers
1 identifiedMore from How I Invest with David Weisburd
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