Private market investors have spent the last decade promoting emerging manager outperformance and announcing commitments to diversify portfolios to generate stronger returns.
Despite this attention for next-generation GPs, a fundamental barrier to their success remains largely unaddressed: the working capital gap preventing talented managers from building enduring firms.
For nascent GPs who do not have personal wealth or deep-pocketed partners, accessing finance to cover costs during their first few months of fundraising is a significant barrier.
Capital call facilities and warehouse lending are financing solutions that have emerged in recent years designed to meet managers’ liquidity needs. These credit products can bridge immediate cash-flow gaps or provide breathing room during critical moments, but they are not designed for the kind of strategic firm-building costs that managers face as they scale across multiple fund cycles.
On the equity side, the rise in GP staking strategies, where fund managers take stakes in newer, emerging funds, validates the need for operating capital early on and at strategic inflection points to foster growth. However, equity structures dilute firm ownership and can impede equitable wealth generation. Until more non-dilutive alternatives become accessible, efficient fund ecosystems will remain an aspiration rather than a reality.
Understanding the working capital gap
Fund management costs pile up long before management fees kick in. Legal, compliance, staffing and travel costs often add up to $150,000 to $300,000 before a first close.
These figures are often out of reach for smaller and less established funds that must balance scale, economics and personal risk tolerance. Banks and traditional lenders are quick to turn these funds away because the perceived risk profiles generally do not fit standard underwriting models and working capital loans are too small to justify the due diligence required.
Instead, GPs are left considering high-risk or high-cost financing strategies. Credit card debt, personal loans, side consulting work and second mortgages are common among emerging managers trying to build a strong foundation for their funds. Even so, they often delay hiring critical team members and forgo needed legal or compliance infrastructure. The impact of these tradeoffs only compounds over time.
The irony is that these creative strategies for subsidizing early fundraising costs get interpreted by LPs as lack of focus or commitment. A manager juggling consulting work to pay the bills may be seen as distracted instead of resourceful. A lean team may signal insufficient capacity rather than resilience under financial constraints.
Today’s emerging managers face the challenge of building funds the same way entrepreneurs build startups, but without the same infrastructure, safety nets or cultural validation that the startup ecosystem provides. The venture capital world celebrates the scrappy founder; the institutional investment world penalizes the scrappy fund manager.
Balancing risks and rewards
Underinvestment in back-office operations and team capacity becomes a worsening problem for GPs as they scale and face more demanding underwriting. Operational due diligence becomes a standard requirement. Managers who have bootstrapped their operations or maintained a particularly lean team may find themselves unable to meet institutional standards — regardless of their investment track record.
LPs also bear risks when managers lack adequate operating capital. As with any portfolio company, undercapitalizing a new manager impairs their ability to execute on strategy, professionalize operations and achieve target milestones to return capital.
Equipping firms with working capital mitigates the risk of delayed reporting, incomplete portfolio monitoring or inadequate value-added support for portfolio companies. The very managers whose lived experience, network or fund size can limit their access to operating capital are often those with the greatest potential to leverage unique perspectives, identify untapped opportunities and access differentiated deal flow.
When a promising manager fails to raise a first or even second fund, the narrative often focuses on performance or market conditions. Whether that manager had the resources to build the relationships, systems and team required to access institutional capital is overlooked. The working capital gap remains invisible in these post-mortems, even as it shapes outcomes.
Building a runway to better LP and GP outcomes
In our work at Catalyze supporting emerging fund managers with flexible capital and through extensive experience investing in emerging fund managers at Spring Point Partners, we have seen that closing the working capital gap requires purpose-built solutions that recognize the varied cash-flow needs of emerging fund managers.
Warehouse lines and capital call facilities from Mission Driven Finance, Community Capital Management, Carta and banks are important tools to address investment-related timing mismatches before and during a fund’s life, but they do not solve the gap alone.
Flexible and non-dilutive working capital loans are a market-based approach aligned with how managers build their firms. These medium-term loans are tailored to hiring team members, engaging service providers and other strategic expenditures that would otherwise not be covered until the conclusion of the fundraising process, drawing management fees for multiple quarters.
The following components are integral to a well-designed working capital product:
- Extending loans to a management company instead of a fund to maximize flexibility across the firm-building lifecycle.
- Permitting broad use of proceeds — for example, for legal, hiring, operations and fundraising — rather than imposing restrictive, narrow categories.
- Sizing loans to reflect the differing infrastructure needs across investment strategies, from venture capital and private equity to employee ownership and private credit.
These elements are central to Catalyze’s GP Runway Fund, which Spring Point Partners is an anchor investor for alongside the Blue Haven Initiative and Gary Community Ventures. Across our portfolio and pipeline, GPs are accelerating new hires, converting part-time employees to full-time roles and expanding platforms to source or support portfolio companies. Early results from the fund show that this approach not only works but moreover has a transformative impact on borrowers.
For example, the fund’s first borrower Fiat Ventures used a GP Runway Fund loan following the first close of its second fund, allowing the firm to accelerate a competitive partner hire. Bringing in a new partner with strategic LP relationships and an aligned investment philosophy increased the team’s capacity to deploy a larger fund and propelled growth at a critical inflection point.
“Taking out a working capital loan allowed us to make a key Partner hire a year ahead of schedule. Our ability to onboard him early had an immediate impact on our ability to fundraise, oversubscribe our fundraising target and to deploy capital effectively into our first five portfolio companies,” says Fiat’s Marcos Fernandez. Within five months of loan closing, Fiat doubled its LP commitments to surpass its target and quickly saw a clear path to its hard cap.
Fiat’s example shows how small amounts of strategically deployed capital can unlock disproportionate value. A $150,000 loan can make the difference between an efficient, successful fundraise and a drawn-out, subscale one.
Finding a way forward
Scaling this working capital model requires collaboration and transparency across the ecosystem. As LPs engage with GPs on operational diligence, they can highlight working capital access as a sign of strength and point to lenders as partners who offer essential infrastructure rather than a concession or favor. Advisors and intermediaries who work with emerging managers should incorporate working capital planning into their guidance.
The end goal is a market where fund managers have access to the same types of strategic capital they extend to their portfolio companies. Venture capitalists understand that startups need runway to reach product-market fit. The same logic should apply for LPs and the GPs they partner with.
Addressing the working capital gap is fundamental to building a more dynamic and efficient private markets ecosystem. The tools to do so exist and the need for them is clear. What we need now is a collective agreement to treat working capital as the infrastructure investment that it is: essential, strategic and long overdue.
Regina Green is managing director of investments at Catalyze. Sabrina Bainbridge is associate director of investments at Spring Point Partners.
Guest posts on ImpactAlpha represent the opinions of their authors and do not necessarily reflect the views of ImpactAlpha.
