The latest batch of questions from readers has them asking about marketing a fund, as well as the nitty-gritty of 506(c) offerings, which came about as a result of the JOBS Act signed in April 2012. Readers also asked about real estate funds.
Q: How should a firm raising a new fund leverage marketing and media, if at all?
A: If a fund is not going the 506(c) route and wants to leverage marketing and media as part of its fundraising, this can be tricky due to rules around pre-marketing and general solicitation. Therefore, a GP should first talk with legal counsel to make sure the marketing and media being considered is done appropriately.
Outside of marketing the fund directly there are other marketing and media avenues investors have leveraged quite successfully. Some investors, typically early-stage VCs. have created personal brands for themselves rather quickly, all things considered, by being active bloggers, media contributors and frequently sharing on Twitter or on the speaking circuit. When done well, this has helped investors get both their names and their fund names established, as well as present themselves as connected, thoughtful and transparent, which resonates with entrepreneurs.
Q: Are 506(c) offerings a warning flag for you?
A: The 506(c) topic is fascinating. We have not yet been pitched by a fundraising using this method so cannot speak from firsthand experience.
If I were to be pitched by one, though, I would approach it in the following manner. First, I would want to know why the firm chose to use a 506(c) offering. For example, I know of funds that have used this type of offering successfully. For them, they wanted to explicitly market the fact they were raising a fund to better connect with entrepreneurs and let the entrepreneurs know they were going to be open for business. In other words, to leverage the press to drive deal flow.
In another case, the GPs successfully raised using a 506(c) offering because it was important to them to talk up the fund as a means to help develop the ecosystem in which they would be investing.
Second, I want to know how much of the current fund a GP anticipates raising through a 506(c) offering and how much of future funds. Like with any fundraise, it is always key to understand why a manager has chosen a particular path or fund structure.
Q: What is the best way to pique an investor’s interest in an emerging fund without an audited track record? Any advice in particular for real estate funds?
A: An audited track record is not the only way to pique an investor’s interest in an emerging fund. An LP will, however, look for evidence of successful investing preferably in the same asset class and geography as the fund that is being raised. This track record could be created by investing personal money or that of family and friends, and therefore potentially not be audited.
It is even better if the track record, audited or otherwise, is through up and down cycles. Evidence of successfully navigating various cycles can be particularly important in real estate funds, as they can be subject to multiple market forces that change over time. Sometimes you also see emerging funds offer special arrangements, i.e., part of the GP’s carry or other idiosyncratic arrangements depending on the fund structure, to help woo their first investors.
Q: What is the typical carry level for emerging managers, particular those with real-estate developments?
A: Typical carry levels for emerging managers vary by type of fund. For example, in venture, 20 percent is a fairly typical starting point for a new manager. However, real-estate funds are more in the 10-percent range.
The general rule of thumb also is that the larger the fund the lower the management fee. So a typical emerging venture fund manager would target a 2 percent management fee, where as a much larger real estate fund would target less. Same with hedge funds and large private equity funds.
Q: I am curious to know if anchor investor deals are taking place in which an anchor might invest working capital in a new fund in exchange for some of a GP’s ownership interest.
A: Yes, anchor LPs have provided working capital infusions in exchange for a GP’s ownership in a fund when a GP does not have sufficient cash flow to start the fund. I wouldn’t say this is common, but it does happen.
The “market” for this though is a hard one to judge as these are highly idiosyncratic cases where the “value” of the GP ownership is relative to the amount of cash going in and the target fund size. What is slightly more common, and still not exactly routine, is an emerging manager offering additional points of carry, usually a couple points of GP carry, to his or her first LPs to help encourage that initial anchor investment. This can then be phased out over subsequent funds until the anchor LP becomes equivalent in economics with other LPs.
The quotes set forth herein are not intended to constitute investment advice and under no circumstances should any information provided herein be used or considered as an offer to sell or a solicitation of an offer to buy an interest in any investment fund managed by Sapphire Ventures. Sapphire Ventures does not solicit or make its services available to the public and none of the funds are currently open to new investors. Past performance is not indicative of future performance.
Beezer Clarkson is managing director at Sapphire Ventures.
If you have a LP-GP question you want to discuss and have it answered in the next Ask an LP column, either leave a comment in the section below or e-mail VCJ Senior Editor Mark Boslet at mboslet@buyoutsinsider.com. You can send a question anonymously or with your name.
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