Run the gauntlet: "go through an intimidating or dangerous crowd or experience in order to reach a goal."
How competitive is institutional fundraising?
Judge for yourself. Here are the diligence findings from a pension fund's search for a value add fund a few years ago.
[PS - The pension invested in one of these funds, and--with the benefit of hindsight--we know it is the strongest non-core real estate fund in the pension's portfolio. Which fund do you think it is?]
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Takeaways from search...
Hyper competitive:
The consultant performed diligence on 24 fund managers. That's 24 firms with teams, processes, track records, etc.
Lots of hurdles:
Only seven managers advanced after three rounds of evaluation.
Deep dives:
Before making recommendations, the consultant conducted on-site diligence meetings with management teams.
Key evaluation categories:
Managers were assessed based on organization, team strength, strategy, process, market positioning, performance, and terms.
Track records count:
The finalists had proven historical performance across multiple funds, emphasizing that past success helps secure future commitments.
Different approaches:
AEW focused on opportunistic/value-add with macro-driven research, Stockbridge targeted middle-market value-add properties, and Virtus emphasized defensive property types.
Goldilocks fund size:
Increasing fund size can be a concern for investors, as larger pools require more deals and may dilute returns.
Fees and terms:
Everyone wants a good deal, and proposed management fees, carried interest, hurdle rates, and preferred returns varied.
Team stability is crucial:
Key-person risk was noted as a concern, underlining that continuity and leadership succession planning are critical.
"Skin in the game":
GP commitments (ranging from 2% to 3% of fund size) were required, showing that LPs expect fund managers to have skin in the game.
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