EM Pro Tips: Herding Cats
In a challenging fundraising environment, closing a private equity (PE) fund efficiently requires strategic incentives, clear deadlines and strong investor communication. Managing this process can often feel like herding cats, as investor priorities shift and decisions get delayed. From what we have witnessed, experienced fund managers consistently implement key strategies to maintain momentum and avoid unnecessary setbacks. Given the current fundraising slowdown, we believe it is especially valuable to share insights from these savvy fund managers who have successfully navigated these challenges.
Tie the Closing Deadline to a Live Deal
One of the most effective motivators for closing a PE fund is linking the deadline to an actual investment opportunity. While investors can still be admitted later, tying the closing to a deal fosters a sense of ownership with the fund manager, making them feel like they are part of the same transaction.
To reinforce urgency, the investment should, if possible, be tied to a signed term sheet - albeit non-binding - to create a clear sense of immediacy among all investors. Additionally, clearly communicating that investors who fail to commit by the closing date will forfeit fee discounts and may be subject to a notional interest rate as subsequent close investors helps maintain momentum. Structuring the deal as contingent on closing shifts the focus from prolonged fund discussions to deal execution, bringing key decision-makers from the LP side to the table.
Set a Realistic Deadline
Setting an arbitrary or unrealistic deadline is counterproductive. In practice, investors are unlikely to take it seriously and the process risks losing momentum. A closing date that keeps getting pushed back can cause all parties involved - including legal counsel on both sides - to lose confidence, leading to unnecessary delays and potential deal disruptions.
To prevent this, internal teams and legal counsel should align on a timeline that is both aggressive and achievable, with clear milestones leading up to closing. For example setting a deadline:
To receive and finalize all LPA comments to permit the final LPA to be distributed to all investors prior to closing
To submit subscription documents for administrator review
To finalize all side letter negotiations
Establishing and adhering to key milestones signals that the fund is being managed professionally and efficiently. A firm yet realistic deadline increases trust and ensures that investors take the process seriously.
Highlight a Strong Pipeline of Deals
Investors are more likely to commit when they are confident that their capital will be deployed efficiently. A strong pipeline of deals reassures first-close investors that they won’t face long waiting periods before investments materialize. It also alleviates concerns about being early participants, as a clear pipeline signals that additional investors will join in subsequent closings - addressing the common fear of being the only ones at the party.
Effectively communicating a well-structured investment pipeline helps maintain momentum, reduces uncertainty and reinforces investor confidence in the fund's execution strategy.
Offer Fee Discounts to First-Close Investors
Fee discounts - whether management fee reductions or performance fee adjustments - can serve as powerful incentives for first-close investors. However, they must be used carefully to avoid setting an unintended precedent for subsequent closes or future funds.
These incentives should be clearly documented to ensure that only first-close investors receive the discount, preventing subsequent investors from expecting the same terms. While fee discounts can create urgency, they should be structured in a way that balances short-term closing goals with long-term fund management considerations..
Final Thoughts
Closing a PE fund efficiently requires a combination of strategic incentives, firm deadlines and a well-executed process. Tying the closing deadline to a live deal, maintaining credibility with realistic timelines, ensuring a strong investment pipeline and selectively using fee discounts all contribute to an effective closing strategy.
