So, You Want to Raise a Private Equity Fund?

The Capital-Raising Challenges and How to Overcome Them: One-on-One Series Discussion With Andy Lund

From piloting fighter jets to plotting successful capital raises, Andy Lund, Co-Head of Houlihan Lokey’s Private Funds Group, talks to Mark Barton about the business he leads and how his team guides GPs on their specific fund requirements, whether it’s a first-time fundraise, a raise for a more mature manager, or a strategic advisory assignment.



In the interview, he addresses the following questions:
  1. How do you navigate the fundamental challenge: getting the early dollars?

  2. How has capital raising been affected by the pandemic?

  3. What should all first-time fundraisers be focused on?

  4. Is co-investment now a prerequisite?

  5. How can Houlihan Lokey’s comprehensive service offering assist GPs on a range of private placement needs?
View the transcript

Mark Barton: Welcome to Houlihan Lokey One-on-One. I'm Mark Barton. Today, I'm joined by Andy Lund. Now, after an 11-year career as a pilot in the Royal Air Force, Andy moved into the equally fast-moving world of private equity—firstly on the sellside before moving in-house on the buyside. Now he's global Co-Head of Houlihan Lokey's Private Funds Group. He and his team provide strategic advisory and placement agency services to alternative investment managers globally. He's here today to talk us through the Houlihan Lokey approach to raising funds and to provide some words of wisdom to those embarking on fundraising during these challenging and difficult times. Andy, great to have you on today.

Andy Lund: Great to be here, Mark.

Mark Barton: Andy, do you want to start with the RAF? How does an RAF pilot become an investment banker?

Andy Lund: Look, flying airplanes for the queen and country was a boyhood dream. So when everybody started having more sensible aspirations—age 12, 13, 14—I still was banging on about being an RAF pilot and ultimately fulfilled that ambition. So, joined the air force, was sponsored through university by the air force. So really it was one of those things where I couldn't believe you were paid to do it. And then ultimately went through the various training cycles both on helicopters and also on fast jets, which was unusual. Got everything out of my system and then decided, when you get to a certain point in life, maybe there's a proper job out there or a different job, and via business school ended up joining forces with UBS and from day one was in that private funds placement agent business. I've done that ever since. So that was the transition.

Mark Barton: Let's talk about the Private Funds Group. How does it differ from other placement agents?

Andy Lund: I'll tell you a little bit more about my trajectory. So having spent some time at UBS, which was a classic blue-chip placement agent business, I actually went in-house as you referred to during the introduction with Advent, which is an absolute top-class firm. Never used the placement agent and didn't know much about it, other than it had tremendous success and formidable returns. But actually being in-house allowed me to see a different side of the business. So I was still working with investors, still helping Advent raise capital, but I was also involved in many other initiatives that were relevant to the investors: reporting, AGM planning, the advisory committee meetings, all these other things that are really important in a private equity context versus just a fundraising context.

So I ultimately left that role. Got an entrepreneurial itch to go and set up a business in partnership actually with another private equity firm, Riverstone [Holdings], who helped get us into business. And what we were trying to create was almost a placement agent 2.0. We wanted to bring some of those in-house perspectives, some of those strategic advisory components in addition, of course, to capital raising into a new firm. And so that's what we did in 2014—we repurposed it. I would say, how do we differentiate ourselves? Firstly, we have to have the experience. So we have about 30 people—that team's done about 250 fundraisings. It's raised somewhere in the region of $280 billion of capital. So there's a lot of experience there. There's also a lot of shared tenure. So three of the four managing directors all work together in multiple places, but we all go back to the UBS days.

So again, we can answer each other's sentences where we've got that longstanding sort of working relationship, which is important. So we have experience and we have that shared tenure, but everybody says that. That's the sort of entry ticket into a meeting with a potential client. Where I do think we differentiate is how we use that experience. So we are super focused—and, again, all other placement agents will say they’re focused—but we really are. We're resolutely focused on doing eight to 10 mandates at any one time because that means we can give our clients the entire team—all of that senior attention, all of that expertise—and really impact one of the processes that we're involved with because some of them require a lot of work. Again, many people say that.

So how do we sort of guarantee to our clients that we are providing that focus? I think it comes back to ultimately alignment of interests. Since we set the business up and since we've subsequently become part of Houlihan Lokey, the senior members of our team invest alongside our clients in the funds that we raise, which we think is the best possible way of demonstrating conviction about one of these fundraising processes. It's almost a buyside decision, if you will. And many other agents won't do that. So we think that is really the sort of key differentiator that sort of allows us to give that focus and that attention to the process overall.

Mark Barton: Which brings me on to the raising funds part—the Houlihan Lokey approach to raising funds. You touched on that element there. How else does your approach differ when it comes to fundraising?

Andy Lund: A capital raise is a process; they’re not generic. You've got to—back to my point about having a Plan A—it will change naturally as the facts change. They're more like political campaigns in some way. You're reacting almost on a daily basis to what you've learned from the investors and what happens at the client level of the general partner level. If they've had an exit of an investment or some news that you want to get out, you're constantly pivoting. So the process will change, but generally speaking, there is a sort of playbook as to how you run these processes. What I would say about the Houlihan approach is, firstly, when we set the business up as BearTooth, we didn't have a black book of clients to sort of walk across the street. We had to go out and create that book of business. So, naturally, we started working with funds very early in their life. So we've done lots of funds, one, two, and threes—the so-called emergent managers. Probably about two-thirds of the business today has been in that sphere. Many would agree that that's probably the most challenging thing. Those are the most challenging mandates, getting the first dollars, but early funds is difficult. So I think as we've grown the business, we've certainly gone through those harder yards, and I think that demonstrates a capability that is very different to perhaps a placement agent that might focus on maybe top-up mandates for more mature managers where it's bringing in a few extra names here or a few names there. We've actually done a lot, spent a lot of our time actually creating new firms, and I think that differentiates us and it really does underscore the approach that we go to market with.

Mark Barton: How has the fundraising process been affected if at all by the coronavirus pandemic?

Andy Lund: I think like all businesses, the pandemic has certainly had a significant impact in different ways. Some neutral to positive, and in many ways it’s negative. The biggest challenge for what we do is, as it relates to COVID, is the restrictions around travel and the lack of physical meeting during lockdown periods. Placing a fund, which is often 10 to 12 years in length, it's an illiquid asset. Often, these funds go for longer than that. I think the average life of a fund is maybe 15 years. If you're an investor, you really want to diligence the people who are behind the team that's going to be investing your capital. I think there's just been a reluctance to gravitate to a virtual process from day one—even though from day one, many of us were adopting Zoom as the new normal, actually underscoring a commitment to a fund. I think LPs generally still want to have that human interaction at some point. So when you can't meet or can't travel, that's the bit that I think has been sort of put on ice, as we're all watching to see what happens in the future. There's definitely been a trend for LPs to move gradually towards a fully virtual process, but I'd say it's still the minority. So that remains to be seen, how that piece is solved going forward.

Mark Barton: You talked about your path from BearTooth advisors, your prior private equity placement agent, to being, let's say, snapped up by Houlihan Lokey. What attributes of that business have stayed the same? I'm talking about the flexibility, the attributes of a boutique firm, because one would imagine the boutique aspect would be very important.

Andy Lund: Actually, we weren't looking as we were quite happy being entrepreneurs and growing our business, and we were enjoying some pretty reasonable success as a BearTooth platform. So it was by good fortune that we got talking to Houlihan Lokey. And actually that was one of the key things for me. When Houlihan ultimately showed interest in acquiring BearTooth, first of all, it was obvious they’d been looking for a business like ours for a long time, and it was the whole Goldilocks syndrome. We were just right, if you will. But also it was an independent boutique. So we felt that was still a continuation of the values that we set out to achieve when we first set the business up. It was hugely sponsor-centric. We got so many touch points with a sponsor community globally and specifically in our core markets, which is U.S. and Europe—that was a huge synergy for us. And it was a mid-market play. It doesn't try and do the bulge bracket mega deals. It's very much the category killer in the mid-market, which is where most of our clients reside. So on multiple levels, it was a great fit. And we come in obviously as a product team, which spans the group globally. That also gives us additional attributes. When we first set up BearTooth, as I mentioned, we were trying to be a placement agent 2.0. What I meant by that is, the capital-raising aspect is always going to be super important, but we wanted to provide a service to our clients that could start in some scenarios where someone's thinking of leaving a bigger firm and starting their own and maybe helping them with that early capital… individual deals before they get to the fund, and then once they get set up, helping them develop that business, new strategies, expansion, etc., into secondaries, single-asset vehicles, and ultimately into situations where they might want to sell a piece of that business. And that was the vision—to be a sort of one-stop shop to really be able to provide all of those advisory services. Of course, that was going to take some time to grow into that. Houlihan just super scaled our ability. So whilst we've stayed pretty true to our knitting and quite focused on the number of mandates that we raise capital for that sort of eight to 10, we're now involved in all sorts of other discussions with the parts of Houlihan that can help with some of those other functions. And, you know, we're part of the glue that holds all that together.

Mark Barton: Andy, what aspect of your job provides you with the most satisfaction?

Andy Lund: Ultimately, it's delivering on our client's objectives. We don't do many mandates at any one time. They all have to work. All are equally important and so would be equally satisfying when they're completed. However, I would say, certainly for those new managers that we help with their first or second funds where it's more difficult, that there's probably an additional layer of satisfaction there given the fact we've really helped get somebody into the private equity business for the first time. That's really rewarding.

Mark Barton: Andy, if I was looking to raise a first-time fund, what are the key things I should be focusing on?

Andy Lund: The first thought is you've got to really know that you want to do it. It can't be a, sort of, nice next step. If you're sitting in a bigger private equity firm and thinking about your future, you've got to show real commitment, real ambition. It's an entrepreneurial journey. So that commitment is really important. LPs will want to see that emotional commitment. So that's the first thing. Secondly, you've got to go into it with an open mind. These processes will probably take longer than you'd like. They'll throw more challenges that you didn't think about, and you've got to sort of roll with the punches. It’s, as we call it with our clients, an emotional roller coaster. So you've got to be prepared for that. And, thirdly, you should speak to someone like us. You should get an advisor because there will be questions every single day which you didn't even know about until you get out there on the road. We've seen it many times where even with a great fact pattern, new firms have unfortunately made a foot fault early in the process, and you don't get a second chance to make a first impression. So having an advisor on side, I think, is really important—particularly in these times, even without COVID, just given how crowded it is and the help needed to navigate that marketplace.

Mark Barton: Andy, you mentioned co-investment in relationship to COVID. Is it now a prerequisite when it comes to fundraising?

Andy Lund: It's not a prerequisite. Co-investment has been gradually growing almost as its own asset class as private equity continues to mature. So most investors can now invest in single assets, which, in addition to the fund commitment, have very active co-investment programs. The reason I mentioned it in relation to COVID is purely because when you're looking for additional catalyst to try and get investor attention, because co-investment is highly attractive, it's just another tool in the tool box that you can use to try and, again, catalyze a fund commitment. So I would say, in this environment, it's very important if you have the capability of giving co-investment to really go about that in the most thoughtful way. Of course, there are other GPs that don't give off co-investment, and therefore it's less of a relevant point. But certainly for those that do, it's quite effective to catalyze the process.

Mark Barton: Okay, Andy, if you could give your clients one bit of advice, what would it be?

Andy Lund: Great question. This may seem like a quite basic response, but I think it is all about thinking far ahead and being prepared, doing everything you can in advance, including pre-marketing activity. We like to be there as early as possible so we can help really inform the narrative and come up with the best possible plan. And that's never been more relevant in this environment with COVID than ever before.

Mark Barton: Andy, fantastic to talk to you today. Thanks for joining us on Houlihan Lokey One-on-One.

Andy Lund: Thank you.

If you would like to discuss fund raising further, please do not hesitate to get in touch with one of the team members listed below.

Contacts

Andy Lund Managing Director
Cristina Forcina Westermann Managing Director
Shea Goggin Managing Director

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