Delio Roundtable: Launching a first-time fund

Delio Roundtable: Launching a first-time fund

24th November 2022

We often talk of first-time funds and first-time fund managers, but the reality is that behind them are people with lots of experience in the space. So, in our latest roundtable, we brought together members of the Delio network who have launched or are looking to launch their first fund, to share their experiences and any other useful information they’ve learnt along the way.

What motivators are there for launching a first-time fund?

There are many reasons why you may look to launch a first-time fund. Our group’s experience reflected this, with some stating that the opportunity simply presented itself, while others have worked with their network to create a fund that fits them.

One member explained how they launched their first fund after doing research into venture capital and finding something they were really passionate about. Initially seeded with their own investment, this fund grew to include 16 other investors from their network of contacts. In their own words; “I was doing the investing I wanted to do and the fund allowed me to invest more than just my own money.”

Another participant explained how their first fund was more opportunity led. They recognised that opportunities were presenting themselves through other streams of their operations. Based on their experience, they created “holy grail” metrics to determine if, with the right capital, a brand would be able to scale efficiently. 

How do you find the first ‘anchor’ or LPs to help your fund take-off?

Finding the ‘anchor’, or the right group of investors, that allows the fund to take off is a vital step. There are various ways of generating that interest, from passion investments to market demand and niche opportunities. 

Our group identified that one of the most common ways to find that initial investor is through your own personal network. One member explained, “I started by asking what the demand was across my close network and then re-engineered it to create a diversified core product.” 

Another seconded this approach, saying “don’t underestimate the network of your network, and don’t be shy to share some of your commercials with them. A lot of our LP base has grown that way.”

One participant also raised that you shouldn’t be reluctant to talk to institutions in the early days.  “When you have the right product, don’t underestimate your ability to get into institutions, but the right institutional partner will often help you with the offer so that it works for them.”

Similarly, on this topic, partnerships and referrals were brought up. Working with business partners such as lawyers you trust who can support you in scaling your operations is important, but can also open new doors for you. 

Of course, as was the case for one participant, if you’re lucky enough to have a hot deal in your hands, conversations naturally open up more easily. 

How do you deal with competition in your market and how do you differentiate?

A clear interest in first-time funds, and a better understanding of them, have started to create momentum in recent years. However, while it may be easier to raise first-time funds than it was previously, the landscape is extremely competitive. 

Differentiation can be difficult, one member of the group explained; “For us, it’s how we add value with our investments. Tying founders into a values based programme. That’s the USP that we’re after.” 

Other members of the group suggested that you can be more creative with management fees, expenses or a lower carry to get the initial interest. “LP capital should be seen as gold dust, it’s super competitive. I think fund managers will be judged ultimately on how much they’re raising, so getting that through the door is beneficial in the long run.”

Another member added that for their first-time fund they approached the market with a unique deal. This allowed them to take an aggressive stance with investors, posing the question “do you think there’s more money in the world, or do you think there’s more deals like this?”

What about deciding on structures and jurisdictions?

It’s essential for a first-time fund manager to consider the structure, jurisdiction and reporting framework of their fund. Every country has their own jurisdictional framework and this can pose challenges when it comes to reaching potential investors. 

It’s important to understand that when operating globally, each country or individual investor has their own views on jurisdictions. One participant explained that “certain jurisdictions can be approved of by some and hated by others. For example in Africa, Mauritius is considered ‘offshore’, but for India, it’s seen as tax evasion.”

For a first-time fund manager this can be difficult to navigate. One member pointed out that “it’s a bit of a chicken and egg situation. You don’t want to go out without deciding on your structure, but also don’t want to decide on your structure before knowing what works for your investors.”

Some advice they shared was to think about where your investors are located, pinpoint the centre and work from there. “You can’t be all things to all people, you just need to be able to capture the most benefit.” 

What is the benefit of a fund of funds?

A fund of funds can become complex and expensive. However, as members of our group highlighted there are some reasons why they should be considered. 

Firstly, the aggregation of small deals opens up more investors. As one member explained, “when deals are so small, unless you can bundle them together, your investors won’t be interested in a smaller investment. By taking this approach, you’re then giving them the opportunity to get sight of much smaller transactions.”

Another member said that offering co-investments via a fund of funds can be an important part of a marketing strategy that builds credibility and “says we’re giving you the opportunity to invest alongside others and help them feel comfortable in the market.” One participant said that in their experience, there’s demand for co-investments as “investors come in and want to double down on the ones they like, perhaps more than the fund allocations can allow them.”

“For a first-time fund you may think that you’re cutting your nose off to spite your face, but this can actually be a way to get investors in and build the track that gives you a better opportunity for the next funds.”

Delio is privileged to play a role in helping to launch first-time funds through our structuring services and technology. If you would like to know more about these services, follow the link below.

Delio's Structuring Solutions