2018: Fundraising at the last chance saloon

Investor appetite for private equity is going up, up, up.

One-in-three LPs plans to increase its target allocation to PE in the next 12 months, according to the Private Equity International LP Perspectives Survey.  Most investors (92 percent) believe their PE allocation will meet or exceed its benchmark in the next 12 months.

The demand is translating into fund commitments. EQT, Hellman & Friedman, Hillhouse Capital Group and The Carlyle Group have all raised flagship buyout funds in excess of $10 billion this year. Advent International has just launched an effort to raise somewhere between $15 billion and $17 billion, joining the likes of Warburg Pincus, Ardian and Vista Equity Partners, all gathering capital for mega funds in excess of $10 billion. We would not bet against them succeeding.

Such big numbers and LP appetite have given the 2018 fundraising market a ‘last chance saloon’ feel and firms with complications in their track records seem to be taking a “raise it now or never” approach.

In late November the industry learned that DH Private Equity Partners – better known as Doughty Hanson – had cancelled attempts to raise a new fund and will manage out its existing assets. This was not a fall-off-your-chair-in-amazement moment; the firm has already had to regroup once after abandoning a fundraise in 2015. In a note to investors, co-founder Dick Hanson pointed to the fact investors wanted the 63-year-old to commit to a “super-keyman” clause, something that at his age he would not want to do. Clearly there was more to the story than this, and performance (neither Fund IV nor Fund V generated a net IRR north of 10 percent, one investor tells PEI) has been a decisive factor.

Which gives context to Terra Firma’s return to market earlier this year. The firm has arguably one of the most complicated track records around. There are recent successes to point to, but they are all overshadowed by the high-profile failure of the firm’s investment in music group EMI. The Guy Hands-led firm has made significant efforts to reshape itself, making some big hires to illustrate that the firm is no longer a one-person show. The biggest hire was Justin King, a corporate heavyweight, who joined to oversee value creation in the portfolio.

King’s recent step away from the firm gives us a clue as to how the fundraising is progressing. Sky News reported this month that the fundraising had been cancelled. This is not technically true, PEI has learned, but in reality it is not moving forward. Investors want to see more rebuilding of the track record through deal-by-deal activity.

Write to the author: toby.m@peimedia.com