The growing appetite for private capital on behalf of investors has led to an increasingly competitive environment. Therefore, managers, especially startups, need to be at the top of their game to fight for those deals.
“Every manager I speak to is both excited and anxious at the same time. There are many good deals available but there are also many other managers going after those same deals,” explains George Teixeira (pictured), partner and leader of Anchin’s Private Equity Group.
He notes a rise in competitive spirit is also causing a growing complexity in the deals themselves. Given managers are intent on winning and making deals, they are having to be more flexible on their fee terms and the way they structure said deals. “They should set parameters for how far they are willing to compromise and adhere to those limits,” Teixeira advises.
The fees that managers command is one of the factors they need to consider when setting those parameters. Having a flexible or innovative approach to the way fees are structured can give an emerging manager a competitive edge. Teixeira points out: “If a fund manager tells me they’re going to offer a 2 and 20 fee structure, I would suggest they consider other structures given the number of investors and the level of capital available.”
Different fee options are now becoming more commonplace in the PE industry with firms offering different fees to investors providing anchor capital (investors who commit early on in the fund’s life) as well as investors committing capital for a longer period of time.
Clear path ahead
Fundraising is critical to general partners (GPs) and will remain a priority – after all a fund cannot be launched without the requisite number of investors and their capital commitment. However, Teixeira cautions, startup and emerging managers should also focus on formulating a clear business plan.
Most funds don’t launch with USD10 billion in assets and therefore will not have a fully staffed support team at their disposal to help with all the heavy lifting and the manoeuvring. As a result, initially, having the right service providers will help startups get going. Those relationships will grow alongside the fund and help the manager along the way. “When you first launch, these service providers are going to be your partner; they will be part of your team,” Teixeira highlights. “Startup managers need support on the practical side, for things like reviewing documents before they’re released to potential investors.
“For example, a PE fund’s limited partnership agreement defines what the manager plans to do. Investors want to read that and understand it. They want this information to provide the comfort that the manager is not going to change what they do dramatically.”
Choosing the right partners can set managers up for success and Teixeira stresses that although cost efficiency is key, the decision should be more focused on service and value rather than the lowest cost denominator.
However, he acknowledges the sensitivity emerging and startup managers have around fees: “At launch, managers often don’t have the capacity to pay high legal or administration fees. Also, they are focused on delivering performance so don’t want that to be absorbed by exorbitant fees at the outset. Most firms and service providers understand this and will work with those managers.
“We have an emerging manager platform and offer these managers lower fees for the duration of their first private equity fund. We know that the goal with private equity is to launch additional future funds, at which point our fees will become a secondary concern. So we partner with them to help them grow to that point, while charging fees along the way that are commensurate with the stage in their business cycle.”
Tax and cyber concerns
In terms of practical support, Anchin provides advice around tax structure, which Teixeira explains is a crucial consideration managers must undertake when first starting out: “They need to know where they plan on investing and what types of investors they will be attracting. These decisions will influence the way their fund should be structured from a tax perspective.”
For example, they need to consider whether they will have an onshore or offshore structure or whether they plan to cater to foreign investors. From the GP vehicle perspective, managers also need to consider what type of entity (or entities) they will need. The most efficient structure will largely depend on types of fees they will charge investors as well as what state(s) they will have nexus in.
Another key concern startup managers need to consider is cybersecurity. This may be an aspect which may be under-serviced. Most managers understand the necessity of investors and accountants but might not fully acknowledge the importance of protecting the data they hold within their firm.
“Managers who don’t have a robust approach to cybersecurity will have a hard time growing or even staying in the industry,” Teixeira highlights. “Even we, as accountants need to be mindful of this. We are privy to so much sensitive information from our clients that if we’re not at the top of our game when it comes to protecting that data, then we wouldn’t be in business for very long.”
From its perspective, Anchin is more than a service provider. Teixeira comments: “We’re a good sounding board for our clients. We want to be part of the managers’ team and help them navigate different aspects of their business operations. Fostering that relationship is very important to our business and we want managers to have faith in us and our advice.”
George Teixeira, Tax Leader, Financial Services Practice, Anchin
George Teixeira, CPA, is a tax partner at Anchin. He is the Tax Leader of the Firm’s Financial Services Practice and Leader of the Firm’s Private Equity Group, as well as a member of Anchin Private Client and the Emerging Manager Platform Team. He is experienced in servicing the alternative investment, private equity and financial services industries. His expertise includes tax planning for high net worth individuals, broker-dealers, venture capital companies, hedge funds (and their investors), investment partnership management companies and general partner entities.