What’s up, everyone? Today, I want to help you answer this question: How much money should I raise for my fund?
“Should I raise thousands, millions, or billions?”
A lot of it comes down to aligning your capital with your capacity.
There are 3 different raise numbers you’ll have to determine for your fund…
- Minimum Raise
- Target Raise
- Maximum Raise
This is the minimum amount of money that you need to take down your first deal.
Let’s say your deal includes 10 multi-family properties and each property requires $10M of equity.
Some may think that you need at least $100M to start your fund.
This is FALSE! You only need enough for that 1 property.
“Well, what happens if I only raise $50M?”
Assuming you only get the 5 properties in your deal, your fund will end up being less diversified, which is less important to the LPs.
And no, you will not be seen as a failure if you don’t get your target raise.
There are many external market factors that are out of your control: market plumets, interest rates go up, etc.
However, in such unfortunate events, I encourage merging managers to build more flexibility in their offering documents.
I’m not sure why, but many investors become disinterested with small target raises; it seems purely psychological.
For this reason, I encourage fund managers to give the investor reasons why your target is so low if it’s less than $10M.
Maybe your reason is that it’s your first blind pool fund and you back that up by saying that there’s going to be a 2nd fund with a target raise of $25M.
Keep in mind that most institutional capital investors want to be with funds long term. They won’t want to invest in small funds with a short life.
Also, it’s important to remember that low-balling your target raise could disqualify yourself from getting in the room with the larger allocators.
“Last year, I pitched a sovereign wealth fund, and my target raise was $150M. After meeting with them in person, they didn’t even consider my deal because their minimum check size was $300M!”Lincoln Archibald
It was just a fundamental disconnect between the size of their offering vs. mine.
“When it comes to a good target raise, it’s all about how much money you can effectively deploy over the course of your acquisition period.”Lincoln
Once you reach your target, your fund will be called “oversubscribed.” This makes you very attractive to investors.
It shows that your offering had so much demand that you were simply oversubscribed to it.
Honestly, no one pays much attention to the maximum raise.
Some managers set a low target and a high maximum to make them look good, which isn’t a terrible strategy…
However, I will say that the industry sways your target, so there might be less leniency there.
Warning: Do not raise so much just to look cool; it’s difficult to effectively deploy large amounts of captial. But, if your strategy will work, then go for it.
Here’s what Lincoln said in closing…
“I would encourage you to start with a smaller fund because although you may be able to make more with more money, you will probably be able to perform better with less.”Lincoln Archibald
“So, how much money should I raise for my fund?”
It’s all about aligning your capital with your capacity, and knowing how much capital you can effectively deploy.
Want to get direct guidance for your fund? Schedule a time with my Fund Advisors!
DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the author