At a recent Private Equity event in Paris hosted by RBC Investor & Treasury Services (RBC I&TS) in partnership with Olivier Younès, Founding CEO at EXPEN, panellists discussed the emergence of first-time team, first-time funds in France and their strategies for survival in a tough fundraising environment.1
Key insights
- Despite the potential for higher returns and demand for first-time funds, securing investors' commitment and closing a fundraising round is a difficult and complex process for first-time fund managers.
- Building an investment track record, anticipating investors' questions and adopting an agile start-up mindset are key in helping build a solid reputation in the investment community.
- A strong team will react quickly to pivot the fund or reshape its strategy in the face of business setbacks or unprecedented shocks like the Covid-19 health crisis.
New funds have been launched by newly-formed management teams for decades in France, either standalone or backed by existing institutions, e.g. banks. According to the panellists, around ten to twenty new structures appear in the French private equity and venture capital space every year, with a growing part of standalone teams. But still the number of first-time team, first-time funds to actually succeed is very limited.
As first-time managers manage only a single, often niche investment fund, they can focus all their time and attention on that particular fund, potentially offering higher returns to investors. However, raising capital as a first-time team, first-time fund can prove difficult.
Securing investors' commitment is a complex process
Managers are often surprised by the lengthy, complex process of securing investors' commitments and closing the fundraising round.
In fact, fundraising is like mountain climbing, according to Nicolas Piau, Co-founder and President at TiLT Capital Partners.
“You think you are prepared, but then you realise you haven't brought everything you need. Or, you have the feeling you are not far from the summit, but then you discover you are five hours away," says Piau. “When you set up a fund, you need to meet lots of people and talk with them. But turning this into a firm commitment is a lot more difficult than you think."
This predicament highlights the paradox of first-time fundraising, which remains to be a challenge despite the abundance of liquidity, a real appetite from institutional and individual investors for this asset class, and the considerable equity financing needs in a large number of innovative sectors as well as a favourable regulatory environment.
The consequence is that there are very few first-time team, first-time funds that appear each year in France, according to Olivier Younès, Founding CEO at EXPEN.
One of the key challenges is often the lack of a track record, since institutional investors feel more comfortable dealing with managers who already have proved themselves with solid investment experience at established firms.
Rodrigo Sepúlveda Schulz, Founding Partner at EXPON Capital, advises would-be first-time fund managers to build experience by starting up and managing companies, in addition to becoming investors themselves.
“When you meet limited partners, it's going to be difficult if you don't have an investment track record. There are a lot of barriers to entry and this explains why there are few teams that take the plunge every year," says Sepúlveda Schulz.
There are a lot of barriers to entry and this explains why there are few teams that take the plunge every year
Still, new managers can make the fundraising process smoother by anticipating investors' questions and preparing ahead.
Paul Degueuse, Partner at Korelya Capital, thinks preparing the correct documentation, understanding the team's weak areas, and testing the fund's positioning are key when pitching to limited partners.
“You have to anticipate difficulties as much as possible. You have to be prepared for hundreds of meetings to make a first closing. You will have to anticipate as much as possible," says Degueuse.
The key to success for managers who take the plunge into first-time team, first-time funds also involves switching to start-up mode and adopting an agile mindset, adds Pierre-Yves Meerschman, Co-founder at Daphni Capital.
“You have to apply to yourself the rules you want to see applied to the companies you invest in if you want to develop. You only exist through the deals you make, but you also exist through the deals you don't make but handle well," he says.
For Meerschman, this means responding to visits, addressing investors' questions and providing added value, because even if the deal does not happen, it will still build the fund's reputation.
EXPON's Sepúlveda Schulz agrees that investing time to bolster the fund's reputation and brand will bring rewards for the founding team. "Becoming embedded in the ecosystem takes a tremendous amount of time. It is an investment that must be made and that brings benefits later. We got into some of our best deals through the back door, because the other venture capitalists on board brought us in," he says.
A strong team will react to major setbacks
You only exist through
the deals you make,
but you also exist
through the deals
you don't make
but handle well
The Covid-19 health crisis created huge upheavals across the markets in 2020 as uncertainty appeared limitless. The investment community reacted, expecting a huge slowdown in business activities, but as the new normal settled in, many funds experienced a surprising uptick in new clients. “We have also observed new management companies being created by transferring teams, or from scratch, and we are also seeing plenty of projects that are still underway," notes Philippe Legrand, Country Head of France, RBC I&TS." But at the same time, we have also witnessed a slowdown of launches which we strongly believed in and which seemed meaningful to us."
New funds, too, had to deal with the shock of the pandemic, in addition to the challenges they normally face when pitching to investors.
It proved a tough situation for TiLT Capital Partners, founded in 2018 with the aim to raise a private equity fund dedicated to the energy transition in Europe.
"You cannot predict what will happen when you set up a company," says Co-founder Piau, noting that a strong team can help build the necessary resilience and resources to absorb any setbacks the fund will likely face in the future.
"What I take away from all the surprises and all the setbacks is that each time one of us had a good idea, is to be able to pivot, to be able to tell ourselves 'OK, we'll start again on something else'."