Defying the market

Despite a bleak fundraising climate, several firms with similar characteristics closed large funds this week, writes Matt Levin.

Wondering what to get your favourite placement agent this holiday season? Check any placement agent’s wish list, and you’re likely to find the same item etched in bold at the very top: a limited partner without an over-weighted alternatives portfolio.  

Anecdotal accounts of a grim fundraising picture were confirmed this week in a disheartening survey from secondaries specialist Coller Capital, which revealed that two-thirds of LPs will likely be at or above their target allocation by the end of next year.

Eighty percent of US LPs, 63 percent of European LPS and 52 percent of Asian LPs have already refused to re-up with at least one of their existing managers this year, with those percentages only likely to increase in 2009.

But despite the miserable environment for new funds, some managers are still able to raise capital at record rates.

UK private equity veterans ECI Partners raised £430 million for its ninth fund, nearly twice the size of its predecessor, in three months.

Massachusetts-based Babson Capital Management and Hong Kong-based HSBC Private Equity both surpassed their fundraising targets with closes of $1.58 billion and $1.47 billion, respectively.

Of course, in the cases of both Babson and HSBC, it did not hurt that both are affiliated with large parent companies less constrained by the type of allocation woes that have plagued the pension and endowment world.

Insurance company Massachusetts Mutual Life Insurance Company committed $900 million to Babson, while banking giant HSBC made a “major commitment” to its HSBC Private Equity’s vehicle.

Yet the funds attracted significant LP support in the broader marketplace.

One reason for their success lies in the firms' vows to LPs that despite larger fund sizes, they would stick to their bread and butter, pursuing the same types of deals that had earned investors solid returns in the past.

That emphasis on “continuity of approach”, as ECI managing director Steve Tudge puts it, helped allay any fears of style drift – a mounting concern for institutional investors that have watched managers increasingly deviate from their investment thesis as debt markets seized up and the macroeconomic outlook darkened.

Another important factor was that the markets targeted by each of the firms are still attractive to institutional investors.

Both ECI and Babson invest in the smaller end of the middle market, a sector a placement agent recently remarked was “still attracting interest” from investors. Meanwhile HSBC Private Equity Asia invests in the region that is the most popular for LPs seeking exposure to emerging markets.

A Zero2IPO Research Centre study recently reported that for the first 11 months of 2008, Asia funds raised $58.1 billion in capital, a 63 percent increase over the amount raised in the whole of 2007.

These fund closes send an encouraging signal that LPs will continue to support strategies and managers they deem reliable and relevant.