Fundraising is one of the core activities for private equity funds, requiring relationship building, forward planning, and significant investment from internal resources. Alongside deploying capital and portfolio monitoring, improving the fundraising operational process within a firm can greatly enhance overall fund performance.
However, when compared to forecasting for portfolio performance and capital deployment, occasionally forecasting in the fundraising domain can be somewhat neglected. Fundraising forecasting, like portfolio forecasting, offers an intriguing opportunity, especially with recent advances in technologies like AI, for funds to develop more confident workflows, drive down costs, and lift overall fund performance.
How Forecasting Can Help Drive Fund Performance
As mentioned, fundraising forecasting can help optimize fund performance across multiple dimensions, contributing to overall strategy and performance.
Given the current market outlook, this is even more important.
40% of firms expect the fundraising market to stay the same over the next year, while 30% anticipate it becoming more challenging, and 30% less challenging. Given that overall PE fundraising was down 4.6% from 2022 to 2023, and 9.6% from 2022 to 2021, we can assume that the overall fundraising sentiment leans negative.
To combat this negative sentiment, let’s dive into how fundraising forecasting can help. At its core, forecasting enables PE funds to fine-tune their investment pipelines and capital commitments. Projecting future capital inflows allows funds to synchronize deal sourcing and due diligence with expected fundraising cycles (both positive and negative), maintaining a steady deal flow without overextending their commitments or internal resources.
By modeling out future fundraising contributions, managers gain the ability to properly align fundraising efforts with current and future (projected) market conditions, which obviously has a major impact on fund performance.
Interest Rate Considerations
Forecasting is also useful for navigating the ever-changing interest rate environment. CEPRES is used by LPs and GPs to capture and integrate historical data across different sectors and market cycles, helping account for interest rate fluctuations in a fundraising strategy. Funds can layer in interest rate data alongside detailed sector performance over time to analyze how top performing funds and their portfolio companies raise money across different interest rate environments.
Portfolio balancing is another key factor in fund performance, and another area where fundraising projections can help drive increased returns. Accurate projections of capital inflows and outflows enable fund managers to make informed decisions about specific sector allocations and investment sizes as new funds are raised. Fund managers can decide, with confidence, how to rebalance their portfolios or when to open or close a given fund.
Viewed in this way, forecasting helps ensure a diverse portfolio, thus leading to better risk-adjusted returns for the fund.
Driving Better LP/GP Interactions
Forecasting fundraising inflows also has an impact on how LPs perform diligence on potential investments, and how GPs present themselves to potential investors. When forecasting is done correctly it deepens the quality of fund evaluation and facilitates more meaningful interactions between investors and fund managers.
This approach transcends traditional backward-looking analysis, allowing for LPs to consider an evaluation that considers future market conditions, past performance, and the modeling capabilities of fund managers. Incorporating fundraising forecasting into these conversations also gives LPs a view into team bandwidth constraints, future fundraising requests from managers, and fundraising resource management and outcomes. For GPs, it presents an opportunity to differentiate and showcase competency, projections, and convictions to potential investors.
This level of openness paves the way for more productive conversations about fund strategy, performance expectations, and potential hurdles. It shifts the dialogue from just reporting on the past to strategizing about the future, showing investors that the fund is proactive and forward-thinking. For GPs, proper forecasting helps to differentiate and can lead to more investor meetings and introductions. In the end, both sides benefit - LPs in that they have a better view of the fund’s future and manager competence, and GPs in presenting more analysis and confidence to investors.
Risk Management and Performance Optimization
From a liquidity risk management standpoint, forecasting allows funds to project future cash flows with greater accuracy, enabling meaningful stress tests that simulate various market conditions and their potential impact on the fund's liquidity. This proactive approach to risk management allows funds to project and tackle challenges head-on, anticipating crisis and ensuring solvency is maintained.
Fundraising forecasting can also enhance a fund's ability to align its investment strategy with its capital raising capabilities. Funds that accurately predict their fundraising trajectory can better plan their deal pipelines, ensuring they have the necessary capital to pursue attractive investments when they become available. This alignment can lead to improved fund performance by reducing missed opportunities due to capital constraints.
Forecasting also aids in optimizing the fund's resource allocation during the fundraising process. By accurately predicting the timing and scale of fundraising efforts, funds can more efficiently allocate their investor relations and marketing resources, potentially reducing costs and increasing the effectiveness of their fundraising campaigns.
Tools to Implement a Fundraising Forecasting Motion
We’ve taken a look at how implementing a fundraising forecasting strategy can help improve relations between GPs and LPs, improve fund performance, and help balance PE portfolios of all sizes. For industry leaders interested in taking the next step, there are a handful of platforms and tech-backed innovations that will help leaders implement this motion within their funds with relative ease.
Since the introduction and proliferation of AI, models are now able to process vast amounts of real-time and historical data to provide detailed and accurate predictions, including in the fundraising space.
Platforms like CEPRES offer sophisticated tools that enhance forecasting capabilities across the private equity landscape. With a dataset composed of over 13,000 funds, over 1,000,000 cash flow and profit and loss statements, and predictive tools driven by AI, funds can get up and running and initiate tens of thousands of Monte Carlo simulation scenarios. With vast amounts of proprietary data powering a sophisticated analysis platform, teams will be able to devote fewer internal resources towards implementation and analysis, and can instead use team bandwidth to execute crucial functions like deal execution and fundraising.
However, it's important to note that while these technologies offer powerful capabilities, they augment, rather than replace, human expertise. The most successful funds will be those that can effectively combine technological insights with deep industry knowledge and relationship-building skills.
Conclusion
We've seen how fundraising forecasting enhances strategic planning and allocation, deepens due diligence processes from LPs, and proves instrumental in risk management and performance optimization. Moreover, it fosters stronger, more transparent relationships within the private equity community, specifically between LPs and GPs.
The advent of advanced technologies has further amplified the power of forecasting, providing funds with unprecedented analytical capabilities and insights. As AI models and platforms like CEPRES continue to evolve, we will see even more sophisticated forecasting models that process increasingly complex datasets and provide nuanced, real-time insights.
As the private equity landscape continues to evolve and become more competitive, effective fundraising forecasting will increasingly differentiate top-performing funds. By enabling more confident and efficient fundraising workflows, reducing capital raising costs, and enhancing overall fund performance, forecasting is not just predicting the future of private equity fundraising – it's actively shaping it.
Sources
Private Equity International, "The data behind 2023's fundraising figures"
