How to Master Private Equity Fundraising: Expert Tips That Work

Private equity Fundraising & Investment has reached a staggering $13.1 trillion in Assets Under Management as of mid-2023.

These numbers show why becoming skilled at the private equity fundraising process is vital now. European markets have seen fundraising surge by more than 50%, yet companies now wait longer between funding rounds—typically 24-30 months. The market has slowed since early 2022, but substantial "dry powder" remains available across North America and Europe that shows steady investor interest. Founders usually sell about 20% of their company's equity during seed funding and another 15.5% in Series A rounds. These percentages show how each fundraising round can affect ownership structure.

Our expert strategies will help you direct your path through private equity fundraising. We'll cover everything from defining your fund strategy to closing deals with the right Limited Partners, and share practical advice that delivers results.

Define Your Fund Strategy and Structure

A clearly defined strategy and structure forms the life-blood of successful private equity fundraising. Every private equity fund needs a blueprint that guides all subsequent activities. Let me show you the critical first steps that will set your fund up for fundraising success.

Choose your investment focus and thesis

A compelling investment thesis is the life-blood of any successful private equity fund. Your thesis helps express how you'll generate returns for investors—it defines what your fund will do. Note that a thesis that works has your fund size, target number of portfolio companies, stages and industries you'll focus on, geographic scope, and how your fund separates from competitors.

Your investment focus needs to be realistic. Your thesis should line up with your team's professional network, untapped market opportunities, and your LPs' investment priorities. A clear focus helps potential investors with matching interests spot your fund as an attractive option. It also discourages founders who aren't a good fit from reaching out to you.

Decide on fund size and target returns

Fund size shapes almost every aspect of your investment strategy: portfolio composition, check size, reserve capital, and ended up affecting your return profile. It also sets the types of LPs you'll attract and sets your management fees, which usually run around 2% of capital under management.

Here's what to think over for optimal size:

• Your investment strategy and deal sourcing capacity
• Composition of your LP base (institutional vs. high-net-worth individuals)
• Size of investments you plan to make
• Target return metrics (IRR and multiples like MOIC/TVPI)

Most private equity fund managers aim for a net annualized IRR of 15% or higher. So, you'll need to explain how you'll hit these returns through your value creation strategy.

Select the right legal structure for your fund

U.S. private equity funds typically use the limited partnership (LP) structure. This setup needs at least one general partner (GP) to manage operations and take unlimited liability, with limited partners who bring in capital. Limited partners' liability usually stays restricted to their committed capital.

The LP structure brings several benefits: operational flexibility, favorable tax treatment (pass-through taxation), liability protection if you have passive investors, and regulatory compliance. Some funds call it an LLC structure instead, which gives limited liability to all owners (members) of the company.

Your choice between these structures should factor in taxation implications, governance dynamics, and investor priorities. Expert legal professionals should guide you to pick the best structure for your specific situation.

Build a Strong Foundation Before Fundraising

Your fundraising success depends on a solid foundation. You need this groundwork before meeting potential investors. A strong preparation phase shows Limited Partners your professional approach and readiness.

Create your pitch deck and offering documents

Your pitch deck must grab LP attention and make them want to see more of your materials. The best PE fundraising decks are 15-20 pages long and should state your value clearly. These are the foundations of a good deck:

• Your team backgrounds and expertise
• The market opportunity and investment thesis
• Your sourcing strategy and decision process
• Case studies (2-3 examples recommended)
• Track record with verifiable performance data
• Portfolio construction and fund terms

You'll need detailed legal documentation beyond your deck. The Private Placement Memorandum (PPM) works as your main disclosure document. Subscription agreements make investor commitments official. Legal teams must review these documents carefully to meet all regulations.

Assemble your core team and advisors

People drive private equity fundraising. The right team members must join LP discussions. Your core team should match your fund's size and include a CEO, Operations Officer, Investment Officer, Financial Officer, Compliance Officer, and investor relations professional.

An advisory board with industry expertise can boost your fund's credibility. External specialists are a great way to get LP confidence. These include attorneys for legal guidance, regulatory experts for compliance, and accountants for financial clarity. First-time fundraisers might want to work with a placement agent to aid introductions.

Set up your data room and compliance systems

A well-laid-out virtual data room makes due diligence easier for potential investors. Put your best materials first - outstanding returns like a 10x angel portfolio should lead your presentation. LPs value honest communication about any gaps in your track record.

Your fund size doesn't matter when it comes to regulatory compliance. SEC-registered advisers must have a Chief Compliance Officer and submit forms like ADV and PF. You also need clear valuation policies, cybersecurity protocols, and ESG standards. These elements play a bigger role in LP decisions now.

Find and Engage the Right Limited Partners (LPs)

Private equity fundraising succeeds when you find the right financial partners for your fund. Your strategy and materials need to be ready before you identify and connect with potential Limited Partners that match your investment thesis.

Identify LP types: institutional, family offices, funds-of-funds

Limited Partners provide capital to your fund without management authority. Each LP type's distinct characteristics play a vital role in effective targeting:

Institutional investors write larger checks (minimum $5 million commitments) and include pension funds, endowments, insurance companies, and sovereign wealth funds. These entities seek returns within their broader investment portfolios that include traditional assets like stocks and bonds.

Family offices manage wealthy families' finances and currently allocate nearly 30% of their portfolios to private equity—surpassing their public equity allocations for the first time in 2023. Family offices differ from institutional investors by providing patient capital with long-term, multi-generational outlooks.

Funds-of-funds act as intermediaries and invest in multiple PE funds rather than directly in companies. They help smaller investors access prestigious funds with high minimum investments by pooling capital.

Use your network to get warm introductions

Relationships define private equity fundraising. Most emerging general partners raise funds through their existing networks and targeted outreach campaigns. The best connections with high-net-worth individuals and family offices come through introductions.

Relationship intelligence platforms help find warm paths to potential LPs. These strategies also work well:

• Use existing relationships with investors and industry contacts
• Join venture capital associations and attend industry conferences
• Connect with VCs who have previously raised funds

Tailor your pitch to different LP profiles

Different LP types have unique motivations and concerns. Pension funds often work with investment consultants, while larger funds typically have multiple "buyers" by strategy and rarely need consultants. Family offices prefer direct relationships with PE houses over private bank connections.

Your initial outreach message should be brief and express your investment thesis in one sentence. Each prospect's communication should highlight what matters most to them—whether that's returns, diversification benefits, or alignment with their specialized interests.

Close the Round and Prepare for Execution

The last phase of private equity fundraising requires careful attention to every detail. After securing interest from potential LPs, you'll need to convert those talks into solid commitments and get ready for fund operations.

Negotiate terms and finalize commitments

The Limited Partnership Agreement (LPA) needs skillful negotiation to secure commitments. This document sets out key provisions like carried interest calculations, clawback mechanisms, and expense allocation practices. Buyout funds typically include an 8% preferred return hurdle, though all but one of these funds now operate without hurdles. Family offices make excellent partners for first-time fund managers and contribute 37% of capital to emerging managers. In spite of that, you should invest your own capital. Successful fund managers usually put in 2-3% of total commitments, while new managers start with 1-2%.

Handle legal closing and capital calls

Your first close happens once you've secured enough committed capital. This key milestone launches your fund and kicks off the fundraising period. Some funds raise their target size at first close, though it's rare. Most GPs secure at least 25% of minimum fund size to start. You'll make capital calls when ready to invest, and investors get 10-14 days to wire funds. It's worth mentioning that bridge financing or subscription lines of credit help fund deals while waiting for LP transfers. These credit lines run 60-90 days, so you can invest right after signing term sheets.

Plan your first investments and reporting cadence

The first close lets you start finding deals while you keep fundraising toward final close. Your reporting systems should be strong since institutional investors expect regular updates on fund performance. PE firms typically send quarterly reports with performance metrics like TVPI and IRR for both fund and portfolio companies. On top of that, the SEC requires large PE advisers to report general partner and limited partner clawbacks yearly. A transparent approach builds trust and becomes crucial for future fundraising success.

Conclusion

Private equity fundraising mastery demands careful planning and execution on multiple fronts. This piece explores key elements that power successful fundraising campaigns. Market fluctuations haven't stopped private equity's growth as an asset class, which makes fundraising expertise more valuable than ever.

A clearly defined fund strategy creates the foundation for future success. Your investment thesis, target returns, and legal structure show your professionalism to potential investors. A strong foundation built before approaching LPs proves your readiness and dedication to excellence.

Selecting suitable Limited Partners remains the most crucial part of successful fundraising. Each LP profile—institutional investors, family offices, and funds-of-funds—comes with unique expectations and needs. Your network's warm introductions will substantially boost your chances of securing commitments compared to cold outreach.

The final stage of closing your round needs precise attention to detail. Your long-term fundraising success depends on negotiating favorable terms while nurturing LP relationships, managing legal closing processes, and planning your first investments.

These fundraising fundamentals will help you succeed in the competitive private equity world. The relationships you build during fundraising often extend way beyond a single fund. Your transparency, consistency, and performance lay the groundwork not just for your current fundraise but all future capital-raising efforts.