Navigating the capital-raising landscape for alternative investment funds in 2025 presents both significant challenges and promising opportunities. As investors become more discerning and selective, fund managers must employ innovative strategies to stand out. The current environment requires a keen understanding of market trends, particularly in high-demand areas like private equity, private credit, hedge, and venture capital.

At CohnReznick’s annual Alternative Investment Fund Summit, industry leaders and advisors gathered to explore the factors impacting the alternative investment fund industry and provide vital insights on charting a path forward. In the afternoon’s panel on capital raising, CohnReznick’s Gary Berger joined Nicole Belmont of Far Hills Group, Peter Tarrant of PilotShip Partners, and Yehuda Braunstein of Sadis & Goldberg to discuss key aspects including the relationship of managers to investors, the intricacies of SMAs and funds of one, and strategies for managers to increase their chances of success. 

The panelists noted that although the capital-raising landscape has become more complex in recent years, resourceful and proactive managers often come out ahead. Read on for top takeaways and contact our team to continue the conversation.

The capital-raising environment

Since 2021’s strong year for fundraising, the past three years have been tougher. The panelists stated that the market is seeing smarter investors and more selective allocators, increasing competition for funds. The lack of distributions from private equities has also hurt the market, making it harder to secure capital. However, there is cautious optimism that the environment may improve slightly, especially for high-performing managers with effective marketing and differentiation. 

Impact of the new administration

The new Trump administration may benefit crypto funds and value/M&A strategies, while ESG strategies may fall out of favor. Increased activity and capital inflows are expected, particularly in private equity, real estate, and venture capital.

Increasing your chances of capital-raising success

• Effective strategies in today’s environment. The panelists noted that certain credit strategies, such as equity-focused, long-only, and private credit, are in high demand. Middle-market private equity and venture capital are also popular. Conversely, event-driven strategies are less in demand, making it challenging to push these options. Managers should align their offerings with what investors are actively seeking. 

• According to the panelists, managers should also expand their reach to a broader range of allocators, including those impacted by illiquid investments. Targeting well-performing sectors like healthcare can also provide opportunities for capital raising. 

• Leveraging the right resources. The panelists emphasized the value of investing in the right technological and human resources. Consider tools like Dakota, which provides comprehensive market intelligence, and PitchBook, known for its detailed financial data and analytics. Collaborate with firms that specialize in capital raising for additional expertise and resources to enhance investment strategies, and enlist marketing firms for help reaching a wider audience. 
• Key factors for successful fund launches. Successful fund launches require strong performance, good timing, differentiation, effective marketing materials, and transparency. When meeting potential investors, managers need a well-rehearsed presentation that clearly articulates what sets their strategy apart.

Building and maintaining a track record

• Starting out. Emerging managers often start with money from friends or family to build a track record. While starting with a small amount of capital can be challenging, strong performance can attract interest from family offices and early adopters. A two-to-three-year track record with good performance, combined with significant marketing and networking, can attract investors, the panelists stated. 
• Challenges with track records. Emerging managers face challenges with track records, especially when previous performance is not transferable to their new ventures. Building a new track record typically requires nine to 12 months of performance data to attract significant interest. Focusing on performance and risk management during this period is crucial for establishing credibility.
• Enforcement actions and disclosures. The panelists cautioned that the SEC closely monitors for misleading track records and performance information. Managers must make their performance claims accurate and verifiable to avoid enforcement actions. Clear and honest disclosures, particularly when presenting past performance involving multiple team members, help maintain investor trust and regulatory compliance.

The role of seeding

• Advantages and challenges. Seeding provides a significant advantage by allowing managers to start with a larger capital base, increasing the addressable market of potential investors. However, it is highly competitive, the panelists said, with seeders reviewing hundreds of funds each year and selecting only a few with the highest potential to scale their business significantly. (One said that his firm reviews around 200 emerging managers annually but only works with two new ones each year, based on strategy, pedigree, performance, and market opportunities.) The seeding market has also seen a decline in activity, with many seeders struggling to raise their own funds and fewer deals being made. Seeders seek managers who can build large, scalable businesses, making it crucial to understand your position and potential in the market.
• Trends in seed deals. No two seed deals are alike, but some trends have emerged. Seeders are moving beyond hedge funds into private equity, real estate, and venture capital. Revenue sharing remains common, with seeders preferring a share of top-line revenue to minimize liability risk while producing a steady income stream. 
• Lock-up and buyback provisions. Lock-up provisions protect the seeder’s investment, meaning managers cannot easily exit without compensation. Tail provisions guarantee seeders a share of future revenues if the manager leaves. Conversely, buyback rights allow successful managers to regain full control of their business, with seeders negotiating buyout terms based on revenue.
• Additional support from seeders. Often, seeders help managers raise additional capital by leveraging their networks and operational expertise. This support is crucial for scaling operations and improving business practices. Seeders may also assist with marketing, accounting, and other operational aspects, enhancing their overall value.
• Control and information rights. The panelists noted that seeders may prefer to remain passive investors but establish guidelines and control rights to protect their interests. These include limits on asset allocation, better liquidity terms, and information rights to stay informed about significant events. Portfolio transparency is important but must be managed to avoid conflicts with other investors.

Separately managed accounts (SMAs)

• Advantages and challenges. SMAs are popular because their customization and control allow investors to tailor investments to their needs. However, managers must navigate individual investor preferences while maintaining portfolio coherence. SMAs offer substantial capital but come with risks, including dependency on a single large investor and the potential for sudden capital withdrawal. Managers with significant SMA allocations may struggle to raise money for commingled vehicles, as potential investors may perceive the business as unstable if SMA capital is withdrawn. Balancing SMA liquidity terms with pooled funds’ liquidity terms can also be challenging, as each type of investment vehicle has different liquidity requirements and constraints. Additionally, SMAs often involve negotiating lower fees, which may not be attractive to all managers. Those who accept SMAs typically do so alongside pooled funds to mitigate risks.
• The evolving landscape of seeding and SMAs. According to the panelists, seeding and SMAs are increasingly blending, and large firms managing vast amounts of money have led to a surge in these activities. In many ways, SMAs are becoming the new seeding market, allocating significant capital to liquid strategies. Managers need to understand if their strategies are applicable and know who to talk to in this market. 
• Fund of one vs. SMA. A "fund of one" often offers better tax treatment and simplifies operations but limits independence, as the manager works for a single investor. Both structures are utilized in the current market, with flexibility varying among investors.
• Innovations in fund structures. Managers are experimenting with limited-time offers for anchor classes to create urgency and confidence. Increased negotiation around exculpation and indemnification provisions is common, especially with sophisticated investors like endowments and pension funds.

Suggestions for new managers  

• Getting started as a manager. The panelists encouraged new managers to seek mentors and learn from their experiences. Surrounding oneself with good service providers can be as important as building a track record. Focus on performance and risk management and be prepared to invest personal capital into the business to demonstrate confidence and seriousness to potential investors.
• The importance of likability and networking. Connecting with investors and having reputable individuals or firms vouch for managers can significantly enhance appeal. The right internal team and external partners are crucial for attracting interest and capital.
• Proactive efforts. Successful fundraising requires proactive efforts, such as attending conferences and networking events. In 2024, those who succeeded in raising capital actively engaged with the market and made themselves visible to potential investors, the panelists said. The shift towards remote work has made attending conferences even more crucial.
• The importance of commitment. Starting a fund requires significant personal capital and resources. Managers must be willing to invest in office space, staff, and infrastructure. Working from home with minimal investment is no longer viable in the competitive market.  
• Performance and outsourcing. Performance is key for successful fundraising. One panelist shared a cautionary tale of a manager who invested heavily in infrastructure but failed due to poor performance. Outsourcing non-core functions like compliance and administration can help managers focus on performance, increasing their attractiveness to investors. 

In conclusion

Adaptability and strategic thinking are crucial in today’s evolving world of alternative investments. Managers who leverage seeding and SMA   opportunities, build strong track records, and maintain clear communication with investors will be best positioned for success.