With deal activity up, plenty of buyers and sellers and a favorable lending environment, it’s no surprise that fund raising has picked up considerably. At press time, buyout funds had raised $30 billion in 2004, up about $5 billion from 2003. What’s more, the rise was not just the result of increasing fund sizes: 130 firms raised capital in 2004, compared with 76 firms competing for LP dollars in 2003. Everyone from small-middle-market focused funds like Castanea Partners, which raised $207 million for Castanea Partners Fund II, to global firms like Hellman Friedman, which closed on $3.5 billion, has been in the trenches this year.
Not surprisingly, all the activity has certainly kept placement agents busy and happy. With buyout shops focused on deal flow, many of them are turning to placement agents to raise the capital.
“It was a good year in fund raising. The year can be split into two parts. The first half was fairly quiet. The market got a lot more positive in the second half as the economy firmed up and more established firms came back to the marketplace,” says Seth Wohlberg, a partner with The Far Hills Group, which raised two private equity funds this year. “During the second half of the year, large firms came back for new funds earlier than expected. As the year-end approaches LPs have had to react fairly quickly to determine their re-ups.”
The numbers certainly bear that out. In the first quarter of the year, private equity firms closed on just $5.8 billion. The second quarter was even more dismal, when only $1.5 billion was reported to have been raised. As a result, the bulk of fund raising has been done in the third and fourth quarters. “People were sorting things out in the beginning of the year, then they got serious about what they were doing, and we have been busy ever since,” one placement agent said.
Larry Henry, the a managing director at CSFB, says his firm raised about 18 funds this year, but turned away more than 400 firms that wanted to retain CSFB to help with fund raising efforts. What’s more, many firms that retained placement agents this year did so for the first time.
Genstar Capital, which raised Genstar Capital IV, a $475 million fund this year, was one of those first-timers. According to the fund’s first PPM, which was mailed out in early July, its original target was $350 million. Jean-Pierre Conte, chairman and a managing director with Genstar, said Fund IV had more than a billion dollars of demand. That’s a far cry from Genstar’s Fund III, which was targeted at $250 million and held a final close short of that in 2001 with $221 million. “Fund III was very difficult fund to raise for Genstar,” Conte says. “Institutional investors, at the time, were excited about venture deals and dotcoms. Middle-market buyouts just weren’t all that enticing to investors at the time.”
Conte says that this time around, Genstar decided to hire CSFB to raise the fund because they were simply too busy to do it themselves. “We were busy on the deal front and wanted to keep up our deal pace and get through fund raising relatively quickly and attract a diverse group of high quality investors. We achieved our goals. We were in and out of fund raising in approximately four months and our investment pace stayed at a record high. We evaluated raising the fund ourselves and I believe we could have gotten in done, but it would have required a lot more of time, which would have dampened our investment pace. We made a great decision.”
Genstar also added new LPs to its Fund IV, which is always a positive-especially at a time when LPs are being much more selective about which private equity funds get their dollars. Among Genstar’s limited partners are The Regents of the University of California, Commonfund, Goldman Sachs Private Equity Partners Funds, The California Endowment, Grove Street Advisors for the Oregon Public Employees Retirement Fund, CSFB Customized Fund Investment Group, LGT Capital Invest Limited, Swiss Re Private Equity Partners, Colgate University, and AlpInvest Partners N.V.
New York-based FdG Associates is another private equity firm that used a placement agent for the first time. The firm is just finishing up fund raising for what is expected to be a $300 million fund. For FdG the decision was based on the need to diversify its investor base-this is not the first pool of capital the firm is raising, but it’s the first from institutional LPs. Prior to this fund, FdG invested capital solely on behalf of the Fisher and de Gunzburg families. “The placement agent gave us an introduction to a broader range of LPs than we could have found on our own,” says Mark Hauser, a managing director at FdG. “In small firms it’s hard to allocate time to this, and it’s very important that it’s done right. The agent pre-qualifies investors and opens doors.”
However, even the biggest proponents of using an agent caution that a placement agent is no guarantee of success. “It still comes down to you, your firm, your track record and your presentation,” says Hauser.
Meanwhile, some buyout shops complain of potentially unfair fees and being just another number when placement agents approach LPs. “I wouldn’t take back using an agent, but there’s a real question of fees,” says a general partner whose firm raised a mid-market fund this year. “For a big firm, it’s not a big deal to pad the fund a little for the placement agent fee, but it doesn’t work like that for smaller firms. Should the firm have to pay the placement agent if an LP that comes into a fund was just re-upping? Should they have to pay if the buyout shop had a relationship with an LP that then decided to invest? These are real issues.”
Another buyout pro said, “A placement agent having too many funds in the market can bring you to a compromising place with your LPs.”
On the other side of the fence, while placement agents do think about these issues, the level of concern is low to nonexistent when considering the current boom in investor demand. “There are plenty of firms that pay and are happy to,” one placement agent says. “Too many firms need to depend on us because we are the ones with the LP relationships.”
It’s also important to remember that placement agents are plenty selective too. They won’t just take on any firm’s fund, and the LPs aren’t automatically reupping either. “Private equity fund raising is very Darwinian: Managers who are percieved to be top quality will be increasingly sought out, while others may find raising capital more challenging and, in certain cases, won’t be able to raise a fund,” says CSFB’s Henry. “LPs have raised the bar, and we have to offer them the highest quality product, especially in the middle market-there’s more demand there.”
Whether firms use placement agents or not, no one is expecting fund raising to slow down in the near future. “The consensus for 2005 seems to be positive. There will be plenty of fund closes all throughout the year,” says Wohlberg. “All the factors that influence private equity remain upbeat and we expect an active fundraising environment for next year.”
Henry agrees. “The market will be crowded next year,” he says. “There will be a lot of people that raised money in the late 1990s coming back, but we are confident that quality GPs are going to get funded.”