The following quotes and nuggets of advice come from industry professionals that participated in a Nov. 10 Webinar hosted by Buyouts.
Mounir Guen, Chief Executive Officer
MVision Private Equity Advisers
“Money is out there, and money will grow out there. As the year started out, it went to venture and growth. It’s now selectively going to buyouts.”
• Europe and Asia have new investors. One European LP has €5 billion of cash; in Asia, people have three or four times that. But they’re going to proceed with caution.
• Because mega-funds are an area of concern, there’s a lot of interest in direct investing and a new concept, real assets, which encompasses energy and infrastructure.
• Germany has a good group of investors but has gone quiet again. In the Nordic region, pensions and insurance companies are active. In the United Kingdom, funds of funds, pensions and insurance companies are active.
David Currie, Chief Executive Officer
SLCapital Partners LLP
“Fundraising in Europe will be difficult for anyone during the next 12 to 18 months. It was difficult in ’06 and ’07 to identify the real winners. This kind of period will sort the men from the boys and ensure that the track record that emerges really does identify those who can do something a bit more different and special.”
• U.S. managers need to be aware that European investors are not accustomed to transaction fees, monitoring fees, exit fees and other fees not being at least 80 percent offset against the management fee.
• In the United States, the “2 and 20” fee model still persists for funds of $750 million to $1 billion. In Europe, that model breaks down at about that level and breaks down quite significantly as the funds get bigger; it’s not uncommon for some of the largest funds to charge 1.25 percent to 1.50 percent management fees.
• To be successful, a manager must demonstrate real differentiation, a strong through-the-cycle track record and LP-friendly terms.
Mark Calnan, Head of Private Equity
“Managers are fast realizing that a fairer deal on fees is a prerequisite to attract capital in this market.”
• Monitoring and transaction fees going 100 percent to the GP will become a thing of the past; the appropriateness of a GP catch-up after the priority return is not clear; management fees should not generate profits for the firm.
• European pension schemes and European LPs in general are perhaps in a better position to have scope to commit capital over the next year or so than their counterparts in the United States.
• LPs are taking their time and avoiding first closes; waiting gives them more information on the manager and on their own valuation and liquidity situations.
Simon Witney, Partner
“Provisions relating to non-EU managers in a proposed system for regulating the managers of alternative investment funds in the EU are very much up in the air. It’s hard to see how any non-EU managers will qualify.”
• Investors could lose access to as much as 35 percent of private equity funds and 19 percent of venture capital funds currently available to them.
• The broad scope of the term “alternative” is worrisome.
• Significant changes are expected, but progress on “third-country” provisions remains uncertain.
Patrick Deasy, Senior Associate
“In the last couple of months, I’ve detected a new feeling of stridency among LPs.”
• A theme of the past few months has been investors doing more due diligence, making sure that management fees don’t become a profit center.
• Funds that are closing are granting sweeteners to LPs.
• The U.S. model uses a deal-by-deal approach, which sees carry pay-out if contributions are returned on all exited investments and any written-down investments, and the hurdle is exceeded on those contributions. The European model favors a whole-fund approach, which sees carry pay-out if all contributions invested to date are returned and the hurdle is exceeded on all contributions.