What track record do institutions require before investing in a fund?
Short answer
Many institutions want a team larger than two or three people, a track record of about seven years or more, and at least a dozen deals done. They also expect numbers on everything, usually audited returns. Below that, you are not yet at an industry standard level of development as a firm, and you may be better off starting with family offices.
Each institution decides for itself. But we talk with investors at our summits all year, and a pattern shows up again and again. If you are a small team with a short history, institutions will usually pass.
The rough line I use: seven years and a dozen deals
In our capital raising webinar, we were asked about fund terms and structures. The answer included a plain benchmark for how developed a firm needs to be before it looks like an industry standard manager.
"If your team is a two to three person team, with less than a seven-year track record and less than a dozen deals done, you're not at an industry standard level of development as a firm."
That is not a punishment. It is a description of where the market sits. Many of the fee levels people quote, such as a preferred return plus a carried interest split, assume a manager who has already reached that level. If you have not, expect more questions on your terms.
This clip covers the benchmark for team size, years and deals, and how it ties to the fees managers ask for.
Summary and key takeaways from this video
What institutional investors expect to see on paper
Think of the investors who often write checks of 10 to 30 million dollars, or 50 or 100 million. These are sovereign wealth funds, endowments, pension funds and insurance plans. Very large family offices are often treated the same way. In that world you are dealing with people who want an in-depth team and an in-depth track record. They want numbers on everything, and usually audited returns.
They also ask you to complete a due diligence questionnaire. These usually run 35 to 70 questions. The first time, it can take a full business day or two. I recommend keeping a master version. Every new question you answer goes into it, and you send the full document to the next investor.
Here I explain what institutions expect from a manager and how a master due diligence questionnaire helps you look institutional.
Track record also changes what capital costs you
Track record matters outside of funds too. One operator I interviewed built car washes. They spent two years on new builds, then added a few acquisitions. They grew from zero to 12 locations in about a year. After that they had enough history to approach institutional lenders. Their cost of capital on the debt side almost got cut in half.
This guest describes how a short but real operating record let them go to institutions and lower their cost of debt.
Summary and key takeaways from this video
The lesson is the same for fund managers. Each deal you complete and document is proof that lowers the risk an institution sees.
If you do not meet the bar yet
Do not wait until you look perfect. Family offices often move faster than institutions and may back newer managers. Use that time to add deals, build the team and get your numbers clean. Then the institutional conversation gets easier. Many managers talk to a securities attorney about how to present performance to investors.
What I have said on this at our events
One caution I give fund managers is not to sit and wait for a long track record before you start talking to investors. Some people in the hedge fund world believe that if you build the record, the investors will come. That is not true, because if you do not try raising capital until the record is long, you will not have learned anything yet. Family offices are also some of the smartest money out there, so I would not assume they are only for managers that institutions turned down.
"Some people think, especially in the fund management industry, and the hedge fund space needs to hear this all the time, that if you build the track record, the investors will come. That's not true either, because if you don't try raising capital until you have a long track record, you're not going to have learned anything yet."
"They should always do their own formal due diligence, even if it's a good friend or someone they know well. But family offices are some of the smartest money out there as well. So I wouldn't just think, oh, we go to family offices because institutions will never invest in this. It doesn't have any track record."
Key facts
- In Richard's experience, a manager with a team of two to three people, under a seven-year track record and under a dozen deals is often below industry standard development.
- Institutional due diligence questionnaires usually contain 35 to 70 questions and can take one to two business days to complete the first time.
- A car wash operator that grew from zero to 12 locations in a year saw its debt cost of capital almost cut in half.
Sources
From Richard C. Wilson's Centimillionaire Strategies YouTube channel: Capital Raising Frequently Asked Questions Webinar, 2 Critical Core Due Diligence Tools - Episode 4, $0 to $500M Raised in 4 Years: Building the Fastest Growing Car Wash Platform in the U.S.. Quotes come from the video captions, lightly edited for readability. Figures are the speakers' own estimates and experience.
General education only. Not legal, tax or investment advice.
Talk to a securities attorney to explore options around track record presentation, fund terms and structure and investor communications. Do not use AI to write your own legal agreements.
Where to start
- 1Count your team size, years active and completed deals against the seven year and dozen deal benchmark.
- 2Build a master due diligence questionnaire from the questions investors ask you.
- 3Gather documentation on returns, and ask about audits when your numbers are ready.
- 4Start with family offices while your track record grows.
- 5Many managers talk to a securities attorney about how to show performance numbers to investors.
More questions on this
Do institutions only invest in funds?
No. In our webinar we noted that the trend is moving toward direct investments too, just like family offices. It is usually the smaller or more innovative institutions asking for them.
How long does a due diligence questionnaire take to fill out?
The first one can take a full business day or two. Most questionnaires share many of the same questions, so a master template makes later ones much faster.
Are large family offices treated like institutions?
Often, yes. Family offices with billions of dollars are generally treated like institutional investors, and they often act like them too.
Related questions
- How do institutional investors evaluate a manager's ESG policy?Institutional investors judge an ESG policy as part of their wider review of a manager.
- What is a fund of funds and how do I pitch one?A fund of funds pools investor money and spreads it across several other funds instead of buying assets directly.
- What is an operational due diligence questionnaire for fund managers?It is the written list of questions an institutional investor sends a fund manager before allocating capital.
- How do pension funds choose which managers to invest with?Pension funds usually pick managers through a group process.
Work through it with the pitch deck grader. See all institutional investors resources.