Fundraising for PE in a recession

For placement agents the current market conditions are a double-edged sword. On the one hand, because it is harder to fundraise, buyout firms are more likely to seek the help of an agent. On the other, many institutional investors are more picky about what they will invest in and are taking longer to make decisions. This puts more pressure on the agents to find LPs the right funds and to offer GP clients a balanced investor mix.

Antoine Drean, founder of placement agents Triago, says that for the year or two leading up to last summer’s credit crunch the fundraising environment was “too good to be true” because there was so much demand for private equity among investors and GPs were returning money to LPs very quickly. When the credit crunch occurred, LPs began to realise that a high proportion of those returns was due to the easy credit available, rather than because of factors such as operational improvements.

People will still be investing in funds in 2008, he says, but not to the same extent as previous years: “Last year about US$400bn was raised globally and a lot of that was mega funds. We won’t see the same amount raised in 2008 but people will still be interested in smaller funds with superior strategies.” There will be particular demand, he believes, for specialist funds such as turnaround, distressed and activist funds in certain niche areas.

He says: “Investors are seeking people who can deliver decent returns based on operational factors and value creation. For example, funds that can identify ‘sleeping beauty’ companies that are more complex than plain vanilla businesses but which offer great prospects if handled in the right way.”

Mega trouble

Stephen Murphy, head of European fundraising at Private Equity Placements Group, says that fundraising is slower because LPs are taking more time in making commitments to both existing and new funds. He says that many LPs are now recognising that in a credit-constrained environment they may have invested too much in mega funds and are therefore now seeking greater differentiation in their portfolios: “There’s recognition that perhaps the mega funds took a disproportionate share of the market in previous years.”

The prediction for Europe this year is that funds will be seeking around €85bn, says Murphy, but he regards this as an unrealistic target given that last year the total was around €50bn: He points out, however, that it’s difficult to compare years, because the bulk of the funds generally get raised in first and second closings, whereas the statistics only reflect the data after the final closing date. As most fundraising is designed to capture two annual LP cycles (to maximise the chances of getting an allocation) the statistics generally lag actual market performance. “There are going to be quite a few disappointed funds in 2008, who will be waiting a long time to get the money they want,” he says.

There is a consensus that the fundraising environment for the mega funds is extremely difficult. But Mark Cunningham, managing director of Helix Associates, says that most of the mega funds probably don’t have to consider fundraising this year because they’ve been raising very large funds in the past year or two and the pace of their investment has slowed dramatically since the middle of last year. “They can take five years to invest these funds, rather than two to three years, as they would still be within their mandate,” he says.

But he adds that, despite the slowdown in investor commitments, there is no shortage of funds seeking placement help: “We’ve seen the volume and calibre of our deal flow increase, which is not uncommon when times are tougher. We’re seeing a lot of well respected names coming and talking to us about the market and the possibility of getting support because they can see that the market is more complicated today than it’s been for a few years.”


Mounir “Moose” Guen, founder of MVision, is also bullish on the market for placement agents in the current climate. The investor base for private equity has been growing year on year in both numbers and volume, he says. The mega funds have distorted the market in recent years, he says, arguing that in terms of the number of deals and of GPs it is still a growing market: “For example, six years ago France had a dozen GPs doing 30 to 35 deals in the mid-market. Today there are about 30 GPs doing about 90 deals and those deals are still only a fraction of the overall M&A and general business activity in France.”

In other words, he says, private equity still has an awful long way to grow in both France and Europe generally: “Continental Europe itself is still an emerging market in terms of private equity and there’s potential for a lot more growth in the underlying platform and that will probably be the case for the next 20 or 30 years.”

Guen argues that today’s difficult economic climate is actually a good time for private equity firms because it offers the potential to buy cheap and, in the future, sell high: “With the credit crunch and economic slowdown, it’s the time to load up GPs and get them to buy stuff.”

He acknowledges that there are “good vintages and bad vintages” in private equity and that it is important to be pragmatic about the implications of events such as the threat of recession in the US. But he points out that the absence of fundraising by the mega funds will not impact that much on boutique placement agents because it was the investment banks that were servicing the mega funds.

What may change, he says, is the pace of fundraising: “In the last few years there has been some bravado around the speed of fundraising. A few years back it took 18 to 24 months but then the expectation was that you had to raise your fund in six months. But there’s no good reason for that, as the time it takes to raise a fund doesn’t alter performance.”

He distinguishes between established players and new funds. First-time funds need to be prepared to spend a long time fundraising, says Guen, because LPs need to be comfortable that the fund is able to execute deals and make investments during the fund raise.

Life after the golden age

The fact that there is so little fundraising by the mega funds going on means that some of the investment banks that have worked with that market are now seeking to move into smaller funds, says Armando D’Amico, managing partner at Acanthus Advisers. There is probably more competition among placement agents in the mid-market as a result, he says, and this may bring some downward pressure on fees. He points out, however, that the boutique agents tend to structure fees differently to the investment banks. “For us it’s more about long-term relationships and often we’re working on more than one fund for a client and providing assistance between funds, so it’s less about front-loaded fees.”

As well as smaller buyout, D’Amico sees growing interest among investors in special situations funds and emerging markets. A few years ago there were hardly any firms offering special situations funds, he says, but this has changed. On emerging markets he says there is a lot of interest among LPs in the CEE region, which is illustrated by the huge growth in fundraising for that part of Europe. In the last three years, according to Acanthus’ own research, around €9bn was raised for CEE funds (including Turkey), compared with about €1bn in the previous three years.

Stephen Murphy of Private Equity Placements Group says that his job is involving travel to a lot more destinations than in the past: “We’re doing a lot more preparation work with GPs before they go out to fundraise. We’re trying to get them out in front of an even wider audience of investors and going further afield in the search for LPs. It’s not just Europe and North America any more, but the Middle East, Asia and unusual places like Iceland. In a difficult market GPs appreciate what placement agents can offer, they feel they need the extra edge that agents can give them, whereas in a hot market people think they don’t need a placement agent.”

Murphy adds that he has also been travelling further to find funds for LP clients, who are looking for investments that will deliver the kind of returns they want at a time when traditional markets like the US and Europe are expected to struggle. “We’ve been scouring Central and Eastern Europe for funds and looking at the new frontiers that might be of interest to LPs, such as North Africa where we’re due to shortly launch a fund.”

Changing nature

It is not just about travelling to more far flung destinations, but also providing a more bespoke advisory service, say agents. Armando D’Amico says that this is a continuation of a trend that began several years ago. Placement used to be about setting up meetings and calling people up, he says, but has become more advisory and included providing support in preparing documentation and in areas such as advising on the best way for a GP to present its portfolio’s unrealised gains. “It’s about advisory not brokerage,” says D’Amico.

Triago’s Antoine Drean agrees that in today’s climate placement agents will have to “dig a bit deeper” in terms of the service they provide: “Placement agents need to really show the GP teams that they can work even smarter in bringing value. For example, we do a lot in bringing new faces to the table especially in areas such as high net worth families.

“We now have 400 to 500 regular investors in the 10 to 12 funds we handle each year and a third of those investors are high net worth families. These are people who can write cheques that are not much less than those of institutional investors. They also bring their own networks and expertise in certain business areas.”

Another area where placement agents are likely to be sharpening their act is in due diligence. Helix’s Mark Cunningham says: “We’ve always been known for due diligence and that has become even more important in areas such as looking at the true value of investments in a portfolio. A lot more questions are being asked at the investment committees of LPs and they’re moving more slowly, which is something that GPs need to factor in when they fundraise.”

There has also been a shift in the terms. “Marginal terms go back and forth but are currently favouring the LP, whereas before the credit crunch it was the GP,” says Stephen Murphy.

The outlook for 2008, therefore, is a slower pace of fundraising, an absence among the mega funds and more focus on areas such as emerging markets funds and those in specialist areas like distressed and turnaround funds. A lot of the spending by the mega funds in the 12 to 18 months before last summer was at or towards the top of the market, says Moose Guen. This means those funds will probably be focusing on sorting out their portfolios. “Those GPs should be slowing down not accelerating their investment,” he says.

He believes that the boutique agents are well placed to take advantage of the growing interest among LPs in funds that invest in countries outside the traditional markets of Western Europe and the US: “The key thing for placement agents is to be adaptable. We’ll be announcing some fund closes soon and for some of them it was about speeding up the process and for others about slowing it down. Although in some ways it’s a difficult environment, there’s still a lot of interest in private equity and a lot of potential for good returns in the future.”