RTC #3: Investment funds need capital (too)

Why today’s issue is valuable to you

Fundraising for investment funds  

• Download the list of the most active VC/PE funds that raised a new fund in 2023

• Understand the concept of raising capital for investment funds

Fire-Chat with Severin Zugmayer (Founder of New Renaissance Ventures)💡

• Find out how it feels to fundraise “on the other side”

• Learn the differences in raising €500m versus €20m

• Why invest as an LP in a smaller fund / Micro VC versus a large fund

Have a kick start in 2024 🚀

• Founders & VC Resolutions: Fewer meetings & better work-life balance

• What Rebecca Lynn, the co-founder of the $400m fund Canvas Ventures, expects for 2024

(Just like everyone else), investment funds need cash too 😲

Happy New Year💥

I hope you have started 2024 well and could enjoy some restful days with your loved ones. Let me start the year with the little present that I pulled together for you given the topic of today’s issue🎁 

Get the list here: Top 10 most active VC/PE funds in Europe and USA that have raised in 2023 one/or more new fund(s)

During the last week, I received a lot of feedback and reactions around the article “PRIVATE EQUITY: Mega-funds push European fundraising close to an all-time” that I shared in the previous issue.

Questions were mostly around

• The concept of fundraising for investment funds

• More details on the current fundraising environment for investment funds

• How it feels to fundraise “on the other side”

Well, remember my words “I am super excited and open to where this journey will take us”…so, let’s do this and explore exactly those topics in more detail in today’s issue.

The concept of fundraising for investment funds

“Investment funds along the Road-To-Capital, such as venture capital, private equity, hedge funds, or mutual funds, raise capital to invest in various assets or companies. The fund's success is tied to the performance of these investments.”

As you know I appreciate a structured approach. So, let’s explore the concept further along the defining parameters and dimensions 👇

Sources of capital

👉 Funds typically raise capital from a range of investors. This mostly includes:

• Institutional investors (like pension funds, insurance companies, or sovereign wealth funds)

• High-net-worth individuals and family offices

• (Especially in Europe) government and development finance institutions

In addition, there is an own group of investment funds investing in other funds the so-called “funds-of-funds”.

Each investor contributes a certain amount of money to the fund starting from a defined minimum ticket size.

Fund structure

👉 Funds are usually structured as limited partnerships (LPs), where the investors are limited partners who provide the capital, and the fund managers are general partners (GPs) who manage the investments.

Fundraising process (investment fund vs start-up)

I compared the general characteristics of the fundraising process of an investment fund versus a start-up fundraising to illustrate the differences in the process for you 👇

Commitment period

👉 LPs make commitments to the fund, which are legally binding. They may not need to provide all the capital upfront but must do so when the fund calls for it (known as “capital calls”).

Fund lifecycle

👉 Most investment funds have a predefined life cycle "(“Closed-end funds”). During this period, they invest in and exit from their portfolio holdings to return the capital and profits to the investors. They often have the option to prolong the investment period for a few more years if helpful for the return profile.

Management and performance fees

👉 Fund managers charge management fees (based on the size of the fund) and performance fees (so-called “carry” based on the returns generated), aligning their interests with the investors. The most common structure is 2/20 (2% management / 20% performance).

More details on the current fundraising environment for investment funds 💰

In case you missed it at the beginning, I pulled together a list of the Top 10 most active VC/PE funds in Europe and USA that have raised in 2023 one/or more new fund(s). You can download it here.

How does it feel to fundraise “on the other side”

But now enough talking from my end, let me hand over the mic to Severin for firsthand insights and experiences from the world of fund fundraisings🎤

🔥💬 Let’s dive right in…with Severin Zugmayer

👉 Raising EUR 500m vs EUR 20m:

RTC: "Are there major differences in terms of investor targeting and pitch focus when raising €500m million vs €20m?"

Severin: “The short answer is: YES. Consider the analogy of selling to SMEs versus large corporations. The approach involves distinctly different pitches, sales cycles, decision-making processes, stakeholders, and so on. Similarly, raising a €500 million fund typically involves raising from large institutional investors and major family offices, in contrast to a €20 million fund, which is often raised from HNWIs and smaller family offices. While both tasks are fundamentally sales-oriented, they require very different skills, preparation, and execution methods.”

👉 Main Milestones  

RTC: “What are the key steps in such a process and how long does the whole process take (if there is an end)?”

Severin: “When there's one thing which is similar to raising € 500m vs € 20m, then it's the preparation and that you will have lots of meetings which need to be planned. A proper fundraising plan and timeline are key. You should know how to work through your funnel which is, in theory, a simple task but in praxis often very tough.”

👉 Key challenges in large fundraisings

RTC: “Reflecting on your experience with raising €500 million of new capital, what was the most unexpected challenge you encountered?"

Severin: “The LPs you think will end up investing in your fund are very different from the LPs which will actually end up investing in your fund.” 

👉 (Smaller) VC Unique Appeal

RTC: "What are two compelling reasons you present to investors for choosing your fund over larger alternatives?"

Severin:

• “#1 - There are lots of data points that smaller funds outperform larger funds. If you look at the top percentile funds, you will rarely see funds larger than € 200m.”

• “#2 - Being an LP in a smaller fund gives you much more tangible access, network, and learning experiences. Big fish in a small pond versus small fish in a large pond, you will feel the difference, trust me.”

👀 What I found useful to read this week

This was Issue #3 - if you loved it, spread the word and invite your network to embark on this 'Road-to-Capital' journey with us 🙏

With only one referral I will send you the RTC Capital Scoop 2024 “What 10 top investors are expecting for the next year”. 👇👇👇

Guess there couldn’t be a better start for 2024. 🚀

See you next Tuesday!

Cheers,
Stephan 👋

Issue #3 | 02 January 2024