“It’s a stark contrast from 2009.”
So says Jussi Saarinen, head of investor relations at private equity giant EQT. He believes private equity would emerge from another downturn in better shape than after the Global Financial Crisis.
As one of PEI’s Rainmaker 50 who has recently overseen EQT’s €10.75 billion fundraise for its eighth flagship, Saarinen is well-versed in the art of persuading LPs to part with their capital. And while the buoyancy of the fundraising market is evident from the monstrous sums of capital gathered for the asset class last year, doing so requires more work than ever.
“In the last bull market, in particular 2007, a lot of investors got caught by the frenzy and maybe they didn’t do their homework as well as they should or could have,” Saarinen told Private Equity International.
“That’s the difference with what we’ve seen in recent years; they are actually digging in quite extensively in terms of reviewing the funds that they look to invest in. What happened on the back of the GFC was that many investors got tough and granular questions from their constituencies and investment committees, and that’s still something in the back of their minds.”
The level of detail required by LPs for their fund diligence process has grown. The Institutional Limited Partners Association’s due diligence questionnaire has standardised investors’ approach and increased focus on issues related to alignment of interest, governance and transparency.
EQT’s latest raise saw the firm target a greater proportion of pensions and sovereign wealth funds, while reducing its relationships with insurance companies and other financial companies, Saarinen said. It also boosted the amount of capital received from LPs in the Americas to 29 percent, from 25 percent in Fund VII.
One of the most common fears amid potential investors was soaring valuations due to high levels of dry powder, cheap debt and increased competition for assets. Some private equity investors have resorted to nudging their GPs over deployment pace as a result of this environment.
“It’s probably one of the first questions that pop up in a meeting,” Saarinen said.
“As a second point, by far the greatest concern they have is many would point to both the macro and geopolitical environment. We’ve had a bull market for quite some time now and I guess everybody’s nervous that markets will turn for the worst.”
“Private equity as an asset class has proven more resilient than many people had thought or anticipated”
The effects of another downturn are unlikely to resemble those of the GFC. In the years following the crash the industry was first hit by the denominator effect and later the liquidity effect due to distributions drying up, Saarinen said. Fundraising dropped from $433.2 billion in 2008 to $237.6 billion 12 months later.
Private equity is now in an improved position, with distributions having outstripped new commitments and drawdowns for seven years in a row, according to Saarinen. And with GPs becoming more creative in their approach to holding periods and restructurings, the asset class may be better prepared to handle whatever lurks around the corner.
“One lesson learned since the last downturn was that private equity as an asset class has proven more resilient than many people had thought or anticipated,” Saarinen said.
“This touches on one of the key strengths of the private equity model; we are typically not forced sellers. We can, to a much larger extent, time markets and continue to build and develop the portfolio companies and then sell them when markets are more benign.”