It’s time for general partners to polish up the tin cup and start rattling some coins to attract attention.
Yes, things are that tough out on the fundraising circuit, with first-half 2009 commitment totals having plunged to about one quarter the amount gathered in the first six months of 2008. Investors are wrestling with twin demons: a lack of distributions with which to make new commitments, and the denominator effect, in which declines in public equities outpace those in private equity, thus carrying investors closer to their target allocations, or above them.
Normally LPs would have gotten their private equity allocations for 2009 in the fall of 2008, but many are only getting them now, said Jennifer Rinehart, a partner at global placement agency MVision Private Equity Advisers. “Most investors are down 20 percent from last year,” said Rinehart. “However the net result is close to a 75 percent reduction in capital available for primary investments versus the prior year, as LPs look to use their allocation to cover any over-commitments from previous years, and adjust the portfolio through cash, secondaries and co-investments.”
As a result, managers trying to raise funds are finding it a difficult slog. Many are extending their closing dates, slashing their targets, trying to expand their usual investor base or making concessions on partnership terms and conditions to get their funds raised. Some are canceling funds altogether, whiles others, including
All told, U.S. buyout and mezzanine funds gathered $18.3 billion in the second quarter of 2009, up slightly from $17.9 billion in the first quarter. The $36.2 billion collected in the first half of 2009, of which $35.6 billion went to buyout funds and $623 million to mezz vehicles, represents only about one-fourth of the $141.4 billion raised in the first six months of 2008. At the current pace of fundraising, the annual tally for buyout and mezzanine funds would roughly mirror the $72 billion raised in 2004, a fraction of the $300 billion that was collected at the height of the boom in 2007. Our fundraising totals reflect capital raised by U.S. buyout and mezzanine firms for LBOs, private equity real estate, infrastructure, distressed-debt control and related strategies, regardless of the location of the transactions.
Some of the notable fundraising successes of the last quarter include
Looking ahead, some believe the end of the gridlock may be in the offing. “I get the sense investors feel we may have finally found a floor in the slide in fundraising that we have been experiencing since 2008—not a turnaround, but a floor upon which to build,” said Michael Sotirhos, a partner with Atlantic-Pacific Capital, a Connecticut-based placement agency. The thinking is that many economic indicators are showing signs of stabilization. Second, a rebound in the public equity markets has somewhat mitigated the denominator effect. And, finally, year-end 2008 and March 31 valuations are all in now and, with the loosening of the restrictions on valuation methodology, many investors feel that the worst (in terms of write downs) may be over.
“These are the factors most boards and CIOs will look at to decide when they can begin to make fresh commitments to the asset class,” said Sotirhos. “There also seems to be a good-sized dose of wishful thinking sprinkled on top of all that as well.”
Part of the fallout of the tough fundraising climate has been the outright abandonment of some funds. In April,
Other firms have trimmed targets, or extended fundraising cycles, to suit the times.
Other firms have changed marketing tactics to improve their fundraising prospects, as the folks at Toronto-based
At that point, Imperial Capital decided to concentrate more heavily on wealthy individuals and families, with an eye toward finishing the fund up last month. LPs include
Another firm contemplating a change in marketing tactics is
As usual, many debut funds are struggling to find support. Teams without track records or popular investment strategies find it hard to attract attention even in the best of times, so the current environment is especially unfriendly to them. Of the 28 funds listed as “debut” in our fundraising list, only seven received pledges so far this year, gathering a total of $2.2 billion. This challenge has led some firms to close their first-time funds vastly under-target.
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To lure stingy investors, firms have been trying harder to entice LPs with concessions on terms and conditions, and the trend is expected to continue. A recent survey conducted by secondary firm
The key areas coming under pressure include fund size; management fees, which have been dropping on average 25 basis points from one fund to another; the split on transaction fees (80 percent to LPs has become common); and the distribution waterfall, whereby some GPs have begun offering LPs the chance to get all drawn-down capital back, plus a hurdle rate of return, before receiving carried interest.
To get LPs to play ball, TA Associates, best known for its growth equity investments and small buyouts, decided to cut the carried interest to 20 percent from 25 percent. Other LP-friendly terms: a management fee that averages 1.74 percent of commitments per year over the fund’s life; transaction and director fees that go 100 percent to a management fee offset; and a no-fault divorce clause. Since March, the firm has received an avalanche of pledges for Fund XI from
Whether other firms do as well as TA Associates depends a lot on what strategies they’re pursuing. As the market shows signs of stability, LPs are expected to be especially drawn to growth equity, specific-sector opportunities, such as in energy and financial services, and regional funds in the Asia-Pacific region, according to MVision’s Rinehart. She added: “We should see more commitments, both re-ups and new, in the second half of this year and early 2010, although investors will remain extremely selective and very slow moving.”