The re-up rate in dollars and in heads, the new money a target implies, and why retention beats prospecting at the margin.
The re-up rate a successor fund needs is the dollar share of the last fund's commitments that comes back, multiplied by how much the returning investors upsize; whatever that leaves short of target has to come from new investors. A $450m Fund IV after a $300m Fund III, with 62.5 per cent of dollars re-upping at 1.3 times, raises $243.75m from existing investors and needs $206.25m of new money, even though 80 per cent of investors by count are coming back.
Worked in full in Private Equity Investor Relations by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The re-up rate is the number a general partner most wants to quote and the one most often quoted on the wrong basis. Investor relations has to compute it in dollars, because the target is in dollars and the investors who leave are rarely the small ones.
| Fund III investors | Number | Ticket | Total | Not returning |
|---|---|---|---|---|
| Large institutions | 6 | 25.00 | 150.0 | 4 |
| Smaller investors | 24 | 6.25 | 150.0 | 2 |
| Total | 30 | 300.0 | 6 |
Four of the six large institutions are not returning: one has reached its allocation to the strategy, one is consolidating managers, two are over-allocated to private equity. Two smaller investors drop out. The returning investors are expected to upsize by 1.3 times on average. New investors are assumed to commit $25.0m each, and on the firm's record about 8 per cent of first meetings with new institutions end in a commitment.
By count: 24 ÷ 30 = 80.0%
By dollars: (300.0 − 4 × 25.00 − 2 × 6.25) ÷ 300.0 = 187.5 ÷ 300.0 = 62.5%
The two figures describe the same investors. Only the second one converts into money.
Keep retention and size apart. A returning investor that halves its ticket is retained, with an upsizing of 0.5 times; folding that cut into the re-up rate hides the reason it happened. And the average upsizing has to be weighted by each investor's Fund III commitment, not taken as a simple average of ratios: a small investor doubling its ticket moves the average far more than it moves the money. Both factors should be recorded per investor in the register, so the plan can be rebuilt as each answer comes in.
New money = target − Fund III commitments × dollar re-up rate × upsizing
450.0 − 300.0 × 62.5% × 1.3 = 450.0 − 243.75 = 206.25
In Excel: =B1-B2*B3*B4, with target, prior fund, dollar re-up rate and upsizing in B1:B4.
Existing investors deliver 54.2 per cent of Fund IV; new investors must deliver 45.8 per cent. At $25.0m a ticket that is 8.25 new investors, so nine in practice. At an 8 per cent conversion from first meeting, nine commitments need about 112.5 first meetings with new institutions. That is the workload the target implies, and it is the number to put in front of the partners before the target is announced.
Using the 80 per cent count rate in the same formula gives 300.0 × 80% × 1.3 = $312.0m from existing investors and only $138.0m of new money. The plan is short by $68.25m before the first meeting has taken place, almost three new institutional tickets, and the shortfall will appear late, when the large investors who were assumed to return send their declines.
The investors who leave are not a random sample. Large institutions run formal re-up reviews, rotate managers and hit allocation limits; small investors tend to follow the relationship. A count-based re-up rate will usually flatter a fund whose largest investors are the ones reconsidering.
| Dollar re-up rate | Upsize 1.0x | 1.2x | 1.3x | 1.5x |
|---|---|---|---|---|
| 50.0% | 300.00 | 270.00 | 255.00 | 225.00 |
| 62.5% | 262.50 | 225.00 | 206.25 | 168.75 |
| 70.0% | 240.00 | 198.00 | 177.00 | 135.00 |
| 80.0% | 210.00 | 162.00 | 138.00 | 90.00 |
Two readings matter. First, there is no corner of the table where new money is zero. To raise $450m from the returning investors alone, those who stay would have to upsize by 2.4 times; at 1.3 times every Fund III dollar would have to return, and more: a 115.4 per cent re-up rate. A fund growing 50.0 per cent between vintages is a new-investor fundraise, whatever the re-up rate.
Second, retention is worth more than upsizing at the margin a team can influence. Keeping one more of the large institutions lifts the dollar re-up rate to 70.8 per cent and re-up capital to $276.25m, saving $32.5m of new money: 1.3 new tickets, or about 16.2 first meetings. A month spent on the one large investor still deciding is usually better value than a month of first meetings.
The fundraising cases, from the stage of each investor to the probability of each close, are in the free workbook for this case. To turn this into a probability rather than a single number, see how to calculate a probability-weighted fundraising pipeline; for the management company's side of the same timing, does a first close cover the management company's costs.
By dollars, because the target is in dollars. In the worked case 24 of 30 investors return, 80.0 per cent by count, but four of the six largest leave, so only 62.5 per cent of Fund III dollars come back. Planning on the count rate overstates re-up capital by $68.25m.
Rarely once it grows materially. For a $450m fund after a $300m one, returning investors at a 62.5 per cent dollar re-up rate would need to upsize 2.4 times on average. At 1.3 times upsizing, even a full re-up delivers only $390m, so new investors are required.
Divide the new money by the expected ticket, then by the conversion rate from first meeting to commitment. In the worked case $206.25m at $25.0m a ticket is nine investors, and at an 8 per cent conversion about 112.5 first meetings.
This article is one calculation from Private Equity Investor Relations. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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