Capital pursuit

At least once a quarter there’s a conversation in PEO's London newsroom that goes something like this:

Reporter A: “Someone’s got a story this morning about the potential Barclays Private Equity spin-out.”

Reporter B: “Has anything changed from the last time we wrote that story?”

The answer is nearly always “no” and we move on to covering the rest of the news that nowadays is coming thick and fast out of the global private equity industry. But what's happening over at Barclays?

As one source told us for a Barclays mulls spin-out update back in April 2009,  and as a Barclays LP confirmed this morning, it would not be “rocket science” to assume most LPs would favour the unit’s independence. Captive groups within banks are often frowned upon by LPs because in addition to being affected by any problems encountered by the parent, they may be more prone to potential key-man and compensation issues.

Amanda Janis

This week, however, it emerged that BPE had progressed in its discussions, with a more definitive plan to spin out later this year. The catalyst for its independence would be when it achieves a first close or substantial fundraising milestone that underscores the group’s ability to stand alone. “Investors don’t want them to spin out and then not be viable,” said one LP.

Central to this of course is the fact that the bank, although likely to commit some capital to the new fund, will not be its cornerstone investor. While fundraising has not officially commenced, and a fund size has not been agreed for its fourth mid-market vehicle, a potential target of £1.8 billion has been referenced in UK press reports. The team’s third fund closed on €2.4 billion in 2007 and is understood to be 70 percent invested.

A potential Barclays spin-out, of course, is a reminder that many banks continue to retreat from the principal investment business – and indeed, may be forced to depending on US financial regulatory developments. But perhaps more importantly, BPE’s spin-out plan is a reminder how important fundraising prowess has become as validation of a manager's abilities. Whether justifiable or not, many potential investors in a fund will seek the reassurance of others' commitments before stepping up themselves.

We highlighted this issue in the May edition of Private Equity International with the release of the PEI 300, our annual proprietary ranking of the world’s largest private equity firms by amount of capital raised in the past five years.  If you’ve not yet checked out how reductions in fund sizes shuffled the ranks, which is the largest non-US firm in the world or the rise of emerging markets based managers, for example, then now is the time. As we also note, a huge amount of the capital now under management by private equity firms was raised in the years 2005, 2006 and 2007 – before the fundraising environment chilled.

Going forward, we expect some significant shifts in the ranks as firms confront stark new fundraising realities. This is not a prediction of wholesale decimation amongst the world's key private equity managers but it will be the case that new fund sizes will be smaller as limited partners not only diversify but also encourage managers to make their dollars go further.

PS: We detailed many of those challenges – from PRI compliance and LP pushback on fees to a changing private placement business – in our fundraising board game, Capital Pursuit. If you haven’t already, download the game and grab your nearest colleague to play along – it’s an illuminating exercise that helps contextualise the many challenges faced by all GPs going to market this year, captive or not. BPE has already downloaded its copy.