A strong performance track record has been, and remains, a prerequisite for a successful private equity fundraise. But performance alone does not tell investors whether a manager is ready to take on more capital. As firms pursue larger and more institutional investors, greater attention is paid to how the business operates and whether the people, processes and partners behind the investment strategy can support the next stage of growth.
For an emerging manager preparing for Fund II, the months before fundraising are an opportunity to take a closer look at the business Fund I helped build. Several years of running a fund provide a much clearer view of what is working, where the team is stretched and where the firm may need additional expertise or support. Making those decisions before the fundraising process begins puts the manager in a stronger position when investors start looking beyond performance and asking how the firm will manage a larger fund.
Operational Readiness Matters
Operational due diligence is where investors look beyond the investment strategy and consider how the firm itself is run. They are not expecting an emerging manager to have the same infrastructure as a much larger private equity firm, but they do want to see that the back office is appropriate for the size and complexity of the fund and that there is clear oversight of the functions that matter.
That becomes more important with Fund II because the business is no longer being assessed largely on the investment strategy. Investors can see how the manager operated Fund I, from the quality and timeliness of reporting to the way responsibilities are handled between the internal team and external providers. Existing LPs have experienced that first-hand, while prospective investors can examine it through operational due diligence.
For emerging managers, demonstrating operational strength does not mean building every capability in-house. As the firm grows, the more important decision is where internal resources are best used and where outside expertise can strengthen the operation. A manager may choose to retain certain accounting or operational functions in-house while outsourcing others or use a co-sourced model to add expertise and capacity while keeping more of the work within the firm.
Those decisions need to make sense for the business the manager is building. If an internal team is spending more of its time on work that requires specialist expertise, additional technology or greater capacity, adding another employee is not always the answer. An experienced provider may be able to support that work more effectively without requiring the firm to build the same capabilities from the ground up.
What investors are ultimately looking for is evidence that the back office has developed alongside the investment strategy. A lean operating model is not necessarily a weakness, just as a large internal team is not necessarily a strength. What matters is whether the manager can explain how the business is structured, why it has made those choices and how that structure will support the fund it is asking investors to back.
Choosing Partners for What Comes Next
The same thinking applies to the service providers supporting the fund. A provider selected when a firm launched Fund I may have been exactly what the manager needed at the time, but the relationship needs to develop as the firm does. By the time Fund II approaches, managers have had the opportunity to see how providers perform in practice and whether they have the expertise and resources to support what comes next.
This is particularly important for the fund administrator because its role extends beyond producing the books and records. The administrator is often part of the LP experience, supporting onboarding, reporting and investor inquiries, while also playing a role in the operational due diligence process. As the investor base becomes more institutional, managers need an administrator that can meet those expectations and demonstrate the strength of its own processes, technology and controls.
The period before fundraising is a natural time to assess whether those relationships are still the right fit. Managers can look beyond what a provider originally promised and consider what the experience has actually been like, including how the provider has responded as the fund has evolved and whether it has the capabilities the next fund will require. If a change is needed, making it before the raise also gives both sides time to establish the relationship and work through the transition before prospective investors begin looking more closely at the operation.
Ready Before the Raise
The period before Fund II gives managers something they did not have when launching their first fund: the benefit of experience. They have seen how the firm operates under real conditions and can use that knowledge to prepare for a business that will become more demanding once another fund is added.
That is ultimately why operational preparation belongs ahead of fundraising. The goal is not simply to be ready for investor questions or operational due diligence. It is to make sure the firm can support the growth it is working to achieve. A successful fundraise can quickly increase the demands on the firm’s people, processes and infrastructure, so the time to prepare for that growth is before the raise begins.
For more information about this topic, please get in touch with Matthew Reynolds using the details below.
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HEAD OF BUSINESS DEVELOPMENT, AMERICAS
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CO-MANAGING DIRECTOR, AMERICAS
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