To fundraise or not to fundraise?

For fledgling secondaries firms, raising a first-time fund can be tough, but it isn’t always necessary to do so.

For fledgling secondaries firms, raising a first-time fund can be tough, but it isn’t always necessary to do so.

Several new firms have sprouted up in the secondaries market in the past year. For them, like any private equity firm, raising a first-time fund is no easy task, especially as they are often lightly resourced and focused on sourcing their first deals.

Last summer, Whitehorse Liquidity Partners was formed by Yann Robard to provide preferred equity in secondaries transactions, then Michael Bego launched Kline Hill Partners to focus on deals in the single-digit million range.

Robard, who previously worked as the head of secondaries for the Canada Pension Plan Investment Board, is seeking at least $300 million for Whitehorse Liquidity Partners I; Bego, who was a partner at Willowridge Partners, is targeting $120 million for Kline Hill Partners Fund. Both have garnered commitments.

So what does it take to raise a first-time fund?

A robust track record for the key personnel is a must and professionals with a history of investing in a specific niche strategy are at an advantage: differentiation is important. It’s also no secret that a willingness to offer sweetened terms and fees will attract LPs.

Even if you tick all the right boxes, fundraising is a time-consuming endeavour, requiring dedicated personnel and strong connections. Add to that a new firm’s need to start pursuing deals and a new shop with a small headcount can quickly get overwhelmed.

There is an increasingly popular alternative. A growing number of professionals are deciding against raising a fund and instead opting to finance transactions on a deal-by-deal basis. Some of the secondaries start-ups seem to take that view.

Sweetwater Capital Partners launched earlier this year led by James Gamett, a former StepStone secondaries head, to invest in secondaries, direct investments and co-investments. It will find deals as a GP advisor for its institutional clients – typically endowments and foundations – instead of raising a blind-pool fund.

We also reported this week that former AlpInvest Partners managing director Tjarko Hektor founded New 2nd Capital earlier this year to focus on GP-centred transactions at the lower end of the market. A source told Secondaries Investor that the firm is already looking at a couple of investment opportunities that could close before the end of the year, but the firm has yet to launch a fundraising.

The advantages of bypassing – or just delaying – fundraising for private equity firms, whether in the secondaries market or not, are clear. GPs don’t have to spend time on the fundraising trail and they can avoid the scrutiny that comes with having to register with the US Securities and Exchange Commission.

The “fundless” sponsor is not a new phenomenon, but it’s an increasingly appealing option, as it taps into a major market trend: limited partners wanting to bypass traditional blind-pool funds and invest direct in the underlying asset.

There are of course disadvantages to going “fundless”. One is the lack of a clear management fee revenue stream. Another is persuading sellers you have the capital ready and ability to execute on deals in a timely fashion.

So even if a firm starts off without a blind-pool fund, it may want to raise one further down the line. If so, then a track record built on a deal-by-deal basis is a useful starting point.

Are deal-by-deals a good way to ease into first-time fundraising? Let me know: