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Crowded US lower mid-market drives competition for capital

Fundraising period for smaller buyout funds has lengthened amid flood of small company-focused funds seeking capital.

Eighty percent of GPs fundraising in the US are seeking to raise $500 million or less amid a highly competitive capital-raising environment that, in turn, is contributing to an increase in the time it takes to raise a lower mid-market fund, according to new research from UK private equity placement agent and advisory firm Cebile Capital.

Diminishing limited partner interest as a result of concentration limits and lack of marketing resources has contributed to lengthening the fundraising period for lower mid-market buyout funds in the US, the study found.

“The average lower middle market fund is taking 18 months to raise, which is approximately four months longer than the average of all funds,” Sunaina Sinha, managing partner of Cebile, told Private Equity International.

Some of the best known US institutional investors in private equity – CalPERS and CalSTRS – have voiced their intent to invest larger amounts of capital with few managers, as have other smaller LPs such as the Public Employees Retirement Association of New Mexico. At the same time, smaller cap funds are generally taking longer to raise due to fewer marketing resources at their disposal, according to Cebile’s analysis.

Sinha said the fundraising environment is relatively favourable, which is helping to attract smaller funds to the market, with about 7-10 percent estimated to be debut funds. Cebile’s findings are the result of discussions with more than 60 fund managers from around the world. The fundraising firm found that the average size of funds in market dropped to $543 million over the first half of 2015, compared with an average of $782 million two years ago.

“There has been a proliferation in GPs raising less than $500 million,” Sinha said.

However, whether some fund managers end up reaching their target amounts is another story, she told PEI. “There is enough LP appetite for the best performers amongst these, but those that have performed poorly or don’t have a credible story will find it difficult to raise their funds or meet their targets.”

As part of its research, Cebile identified several strategies that managers of lower mid-market funds can implement to boost their capital-raising prospects, including establishing a pre-fundraising marketing period of six months or longer; raising capital in the immediate geographic area where a GP’s offices are located; and holding a first close at one third of a fund’s target size.