In private equity, the prevailing view is that there's no greater validation of a firm's worth than the successful raising of a new blind pool fund. Conversely, if a firm cuts its target – as Permira has done, it emerged this week – or abandons its fundraising altogether, it's usually seen in the market as a sign of weakness or even failure.
Everybody knows how hard it is to persuade LPs to part with their money at the moment. Everyone knows that there won't be enough capital to fund all the firms in market this year. And everyone knows that even in a best case scenario, a successful fundraise will take up an awful lot of time, energy and resources. In such circumstances, how rational is it for a firm to commit (or remain committed) to a full-blown fundraising process?
The trouble is that scaling back your ambitions – or trying to get off the carousel altogether – still involves a loss of face, regardless of the underlying logic. Firms who follow Duke Street’s lead by choosing to switch to a deal-by-deal model will almost certainly find themselves stigmatised, however compelling their rationale.
Many of the biggest and most sophisticated investors are looking for greater control and flexibility over how their money is invested. Increasingly, they'll also want more liquidity options and more transparent pricing. None of this is terribly compatible with a 10-year blind pool fund.
The industry’s investor base is also changing: banks and insurers are already withdrawing from fund investing, and pensions may follow suit, if the regulators do their worst. To attract different sources of money, the industry may need to offer different structures.
European venture is a case in point. Returns have been so grim over the past decade that many traditional LPs are
For GPs, the advantages of blind pool capital are clear: it probably gives them an execution advantage, and it means they don't have to worry about fundraising for another few years. But as far as LPs are concerned, the picture is much less clear.
But how easy is it to imagine a world where a well-known buyout firm could do something similar without raising eyebrows?
The point is that private equity firms should be agnostic about how their vehicles are structured. As one manager put it to us recently, a GP's job is not to preserve the existing fund model – it’s to make sure that investors' capital is delivered to companies in need of investment in the most efficient way possible.
Having a single long-life blind pool fund is one way of doing that, but it's by no means the only one – it may be that other options like pledge funds or specialised vehicles or segregated accounts or listed vehicles or deal-by-deal arrangements are more appropriate for private equity's future investor base. It's time the industry as a whole started to accept that.