A global fundraising tour

Fundraising in 2012 will continue to be challenging, but new entrants into the private equity market from around the globe will ensure that capital will be looking for funds, writes Alan Pardee.

While we have seen extreme volatility in the capital markets over the last two years, combined with the euro-zone crisis and the serial dysfunctions of Washington, there are reasons for cautious optimism. 2012 should be a better time for fund raising than 2011. If we assume that we avoid the collapse of the euro and a worsening global economy, on a country by country or regional basis we have signs of economic and investment activity that should drive fund raisings for 2012.

In the US, we seem to have an economy that has stabilised, which, of course, is different than growing. While Asia and Latin America appear to be cooling, they continue to be engines for growth globally. Capital markets, while volatile, are functioning. Private equity firms are making investments again, even if fewer than at the start of 2011, and realisations and re-financings are at some level getting done. These realisations return capital to LPs and the staff of each can go into their investment committees and CIOs to remind them that private equity still works. 

If we take a quick global tour, in the US, pension funds, in particular, are generally capitalised and have availability of allocations to invest in the asset class. Endowments and foundations were somewhat more muted given the illiquidity they experienced, but they have begun to return to investing as well.

Realisations return capital to LPs and the staff of each can go into their investment committees and CIOs to remind them that private equity still works.

Alan Pardee

We see the Canadian pension funds being active. Scandinavian limited partners are focused, capitalised and making investment decisions. The Dutch have been relatively busy during the bottom of the downturn and continue to be focused on attractive investment opportunities. 

In the UK, some pension funds, funds of funds, insurance companies and family offices are investing, if at lower levels than at the top of the market. The Swiss have certain institutions and funds of funds investing. Much of the rest of Europe is relatively quiet, with a few exceptions, given the dislocations occurring presently.

In the Middle East, investment activity from limited partners into funds continues apace, while some have refocused on direct investment activities. In Asia, we have seen significant activity both for fund raisings for general partners based in Asia and for those elsewhere in the world.  China, Singapore, Hong Kong, and Korea have been particularly active. In many cases, Asian limited partners have driven the successful outcomes for a number of fund raisings. The Australians continue to focus on the asset class as well.

Latin American LPs are new to our market, but are beginning to make investment decisions. Our firm, Mercury Capital Advisors, the spin-out of the former Merrill Lynch Private Equity Fund Group team, has partnered exclusively with HMC Itajuba, itself formed from the placement teams of big banks in the region, Larrain Vial in Chile and Banco Icatu in Brazil, to provide general partners globally with access to this opportunity. There are on the order of 15 pension funds in Chile, Colombia and Peru that are newly active in investing in private equity funds globally and nearly twice that number in Brazil that should begin investing outside of Brazil over the next couple of years. We are collectively working on a number of fund raisings to bring investment opportunities from around the world to this region.

Rates of return from private equity investments should continue to outperform the public markets. With yields on fixed income investments at generational lows and returns on public equity markets uncertain, we believe that CIOs at a number of LPs will continue to refocus on and apply energy, resources and capital to private equity funds. That said, there will continue to be a brutal sorting process as LPs which have, say, 80 GP relationships with 50 of them coming back to market in 2012 and 2013 may prioritise half of them for re-ups and perhaps pass on the other half in favor of either new relationships or the consolidation of commitments with the other 25.

In summary, 2012 will continue to be challenging, with both a crowding of GPs in the market or coming to market and with constrained capital available, but there is room for maneuver to produce successful fundraising outcomes for those with attractive track records, consistent strategies and demonstrated value creation.
Alan Pardee is a managing partner at Mercury Capital Advisors.

Alan Pardee is a managing partner at Mercury Capital Advisors.