Raising a new fund in 2024?

Raising funds over the 2023 calendar year, and in particular over the latter half of the calendar year proved difficult for many.  The collapse of Silicon Valley Bank in March 2023 saw LPs take a renewed interest in their markets and risk exposure through their underlying GP investments, and the drop in equity markets meant that less was available for allocation to both venture and PE by LPs.  Both in Australia and in the US, we saw an underlying “back to basics” sentiment in the expectations that LPs had of their GPs, particularly when assessing new GPs raising capital. Total capital raised by US funds in 2023 declined by almost 62% and dropped to the lowest level since 2018.  This caused many GPs, both new and existing, to push out their fund raising timetables from late last year to 2024, and some even longer, in hopes that LPs would again turn on the taps once equity markets recovered.  

2023 therefore gave LPs time to breathe and reflect, and to reach a perspective on the performance of their existing roster.  For new GPs raising new funds, it was a tough run, as LPs rebalanced portfolio away from PE and VC as equity markets fell, and due diligence processes ran far harder.

Selection of GPs is not an easy task for LPs. Given the very nature of fund construction and LP/GP dynamics, there are few decisions required once the decision to commit to a fund has taken place.  For this reason, LPs do all of this work upfront. For institutional LPs, the bar is set even higher, with decisions to invest taken only for the most proven managers with the most transparent and best performing track records. 

Cash distribution has been high on the agenda for many LPs over the past year, and has been a core evaluation measure for new and existing managers.  Worth noting that US VC cashflows remained negative over 2022 and 2023. 

The most difficult experiences over the last 12 months have been experienced by new managers establishing funds, and seeking institutional capital, as distinct from established managers raising new funds. Most existing managers have established a track record with their LPs and within the industry, while new managers generally lack the quantitative data points required to demonstrate both fund and personal track record.  Even experienced managers have not been immune from these difficulties, given that many times experienced managers leave a successful fund, which has contributed to their personal track record, to pursue a new strategy within a new fund. 

Getting the attention and respect of LPs takes time.  Morningside has reported that areas where GPs lose favour tend to be where (a) funds have ballooned without a clear and compelling rationale or accompanying strategy; (b) a lack of prudence and discipline when chasing hot sectors and shifting above industry multiples in competitive processes; and (c) transparency and active communication around capital calls.  

GPs are also increasingly distinguishing themselves by showing how they will bring unique and quality deal flow from their networks, and how they build and nurture relationships with founders and advisers to bring quality deal flow into the fund for potential deployments and ongoing relationships. 

For financial advisers, this creates a two way street where authenticity is key, and where we tend to look for the same characteristics that funds look for in qualifying whether we will bring a deal to a capital partner - authentic leadership, vision, a competitive technology or know-how edge to clear the moat, a clear pathway to market, and a diversity of customers waiting on the other side. The Rennie Capital Team curates inbound deals carefully before taking them to a small number of PE and VC firms with whom we have developed trusted relationships, and who are keen to establish a quality pipeline of deals which are on mandate, stage and ticket size.  These types of relationships with firms such as ours, as well as the larger number of origination activities already underway inside most funds, allows GPs to stand-out in being able to leverage investor, adviser and founder relationships to provide value-add to LPs. 

Are you a fund or a founder/management team looking to continue the discussion? Please email a member of our senior team to arrange a meeting.