First-time Funds Series – Video #3: Marketing the Fund and Settling Key Terms

In the third installment of our first-time funds series, private equity lawyers Shannon Gotfrit and Cal Hunter unpack marketing first-time funds and tips in promoting funds to prospective buyers, including:

  • the four main stages of the marketing process for first-time funds: preparing a pitch deck, identifying target investors, preparing a term sheet and negotiating with investors;
  • how the purpose of a pitch deck is to present a strong case to investors about why they should invest;
  • the three main categories of investors that are targeted by fund sponsors;
  • how term sheets are short summaries of key commercial and legal terms of the fund; and
  • the fundamental role of the investor base.

Play the video above to watch the informal discussion and stay tuned for the next episode on drafting legal documents and finalizing terms.

Click here to visit the main First-time Funds Series page.


Shannon Gotfrit (00:06): Welcome to the third installment of Torys' First-time Funds video series. My name is Shannon Gotfrit. I'm a Partner in Torys' Private Equity group and I'm here today with my colleague Cal Hunter, an associate in our group, to discuss the marketing of first-time funds.

Cal Hunter (00:19): Thanks so much, Shannon. This should be a great discussion. As you mentioned, we're focusing on the marketing of first-time funds today. So, Shannon, just to set the stage for our discussion, what do we mean when we talk about the "marketing" of a fund?

Shannon Gotfrit (00:30): Sure, Cal. What we really mean here is promoting the fund to prospective investors. Often this involves making a pitch to investors about the investment thesis, strategy, and key legal terms of the fund, and then negotiating with investors with the hope that they eventually sign up to become investors in the fund.

Cal Hunter (00:47): Okay, great. So based on what you've described, it might be helpful to think about the marketing process as having four main stages: first, getting a pitch deck; second, identifying target investors; third, preparing a term sheet; and fourth, negotiating with investors. Let's start with the first step. Shannon, in your view, what are some key things for sponsors to think about when they're making a pitch deck?

Shannon Gotfrit (01:09): The purpose of a pitch deck is to present a strong case to investors about why they should invest in your fund. There are a few topics that we typically see covered in pitch decks. These include: (i) a summary of the fund's investment thesis and supporting data; (ii) a summary of what differentiates the fund from other funds in the market; (iii) projections for future returns, and in some cases, past performance information of the fund's investment professionals from their prior experience; and (iv) background information on the fund's key investment professionals. Now, there are a couple of things to note here. First, securities laws generally apply to pitch decks, so make sure to run your deck by your legal counsel before sending it to investors. Second, the content of your pitch deck may be impacted by your investor base—and Cal, I think this leads us nicely to the second stage in the marketing process.

Cal Hunter (01:56): Agreed. Next up, we want to talk about identifying the target investors for your fund. There are typically three main categories of investors that are targeted by the fund sponsors, namely: (i) friends and family; (ii) high net worth individuals and family offices; and (iii) institutions such as banks, pension funds and other similar organizations.

Shannon Gotfrit (02:13): Okay, and how do sponsors determine which of these groups to target for their funds?

Cal Hunter (02:19): In our experience, it really comes down to a few different factors, including the relevant experience of your investment team, your contacts within the industry, and how much money you're hoping to raise. Now, most first-time fund sponsors have relevant experience and some contacts, but not necessarily enough to justify a particularly large fundraise and to attract investments from institutional investors. As a result, you often see some first-time fund sponsors start with friends and family and high net worth investors as their core investor base. Then, after the first one is successful, sponsors may find it easier to attract larger institutional investors and raise more money for the second fund, given that there's now an established track record for the investment team. Shannon, the next step in the marketing process is preparing a term sheet and then negotiating with investors. For starters, what is a term sheet and how is it relevant to the marketing of a fund?

Shannon Gotfrit (03:03): For sure, Cal. The term sheet is really just a short summary of the key commercial and legal terms of the fund. The term sheet plays an important role in the marketing process for a few reasons. First, it's written in plain English, so it's an easy way for investors to understand the fund's key terms at a high level. Second, it is a great way to kick-start negotiations with your anchor investors and iron out any significant issues involving the terms before taking the time and money to prepare the full-length legal document.

Cal Hunter (03:30): Interesting. So, you started to touch on the next step, which is negotiating with investors. In your view, what are some key factors that influence the negotiation process for a first-time fund?

Shannon Gotfrit (03:40): In our experience, the investor base plays a huge role here. For example, if your investor base will mostly be friends and family, we would not expect a heavy round of negotiations. However, if you were going to be admitting high net worth investors and family offices, or even institutions, we would expect more extensive negotiations, particularly if these investors plan to make a commitment that represents a large portion of the fund's capital. These more established investors also often have more leverage in the context of a first-time fund, given that sponsors may not have a proven investment track record at that time. We sometimes see first-time funds offer fee and carry discounts to large "seed" investors, especially if the seed investor participates in the fund's first closing. Cal, anything else you want to add on this point?

Cal Hunter (04:24): I totally agree with you, and I'd also add that the fairness of your terms can have a big influence on negotiations as well. For example, if you go to market with terms that are extremely favourable to the sponsor, your investors will be more likely to push back on the terms. However, on the flip side, you also don't want to go to market with terms that are overly LP-favourable and therefore adverse your interests. This is where your legal counsel can play a helpful role to ensure that the term sheet is reasonable in terms of a starting point for negotiations and is also generally consistent with market.

Shannon Gotfrit (04:53): That's a good point. Thanks, Cal. And with that, I think we can wrap up our discussion today on the marketing process for first-time funds. We hope you found this helpful and of course, please feel free to reach out to us to discuss any questions you may have. On behalf of Cal and myself, thanks so much for tuning in, and be sure to check out the other videos in Torys' First-time Funds Series.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

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