fundraising special - BVCA admin

Comment
Mega funds
or mega flops?
Amid increased LP scrutiny, question marks have been raised over the ability of the world’s
largest firms to raise the sorts of capital they are used to. Patrick McCurry reports.
In the boom years many LPs were desperate to invest in large,
or mega, buyout funds. But since the financial crisis LPs have
questioned a business model that appears to rely on high leverage, a
rising market and financial engineering to achieve results.
That does not mean that all mega funds will struggle to raise capital
going forward, but LPs have become choosier and future fund sizes
are unlikely to match some of the huge sums raised in the past.
Some traditional investors, such as endowments and foundations,
have reduced their commitments to private equity and less
sophisticated LPs, such as some family offices, have withdrawn. But
insurance companies are still interested and there have also been
some new entrants, such as sovereign wealth funds, who have lots
of liquidity but are also very demanding.
Kurt Bjorklund, co-managing partner at Permira, is positive on the
future trends for fundraising: “Even LPs that have had a rough ride
are now starting to see significant capital returns and an improving
macro environment.” Private equity is relatively attractive to these
investors, he says, as bond returns are threatened by inflation.
“LPs are returning to a more normal investment approach, though
funds are likely to be a little smaller than in the past,” he says, adding
that although the mega funds were out of fashion a year ago things
have moved on. “The industry hasn’t seen the widespread busts in
portfolio companies that some were predicting and in our latest
fund we’ve seen EBITDA growth of 40% in the past year.”
An indication of the environment for large funds will be how well
BC Partners does this year in its attempt to raise nearly €6bn – the
largest European fundraising since the collapse of Lehman Brothers.
Cinven is also planning to fundraise.
If these two manage to successfully meet their targets, and the initial
indications are encouraging according to people in the market, it will
send out a positive message for other large funds.
Andrew Bentley, a partner at advisory firm Campbell Lutyens, says
the sheer size of mega funds brings its own challenges given the
liquidity issues facing LPs: “To raise a similar sized fund as in the past
a mega fund may need to deal with twice as many investors, which
means the fundraising is likely to take longer.”
He adds that there has been some disaffection with larger funds and a
backlash against fees. “There’s a perception that they did well in a rising
market but will find it harder in today’s climate, so GPs really need to
demonstrate that they know the companies and sectors they invest
in extremely well and can add value at a strategic and operating level.”
Moose Guen, founder of PE advisers MVision, says that the mega
funds have experienced a hit to their reputations since the credit
crunch, which has not always been justified: “Every market segment
has had its disasters and whether a firm does well can come down
to luck, as well as the competency of GPs and the DNA of the fund.”
He adds that across the board LPs are reducing the number of PE
relationships they have, which means it will be harder to reach first
close and, even more so, final close. “It will be crucial that fund
targets are of an achievable size and that GPs have the support of
both existing and new investors,” he says.
William Gilmore, investment director at Scottish Widows
Investment Partnership, says he expects there will be some
consolidation in investment relationships, with LPs feeling they
don’t necessarily have to be in every fund. “There will be some
haves and other have nots in the fundraising market, because
we’re in a period of capital rationing, so some long-term investor
relationships will fall by the wayside.”
He adds that if an LP has historically been invested in four very large
funds it may decide only to invest with two going forward, partly
because of capital rationing and partly because of a perception that
the number of transactions executed by larger funds will be smaller
in the future.
January 2011 BVCA Briefing 11