On paper there’s never been a better time for general partners to diversify their investor base; limited partners are piling into the asset class and fundraising is rampant.
Some GPs are finding their funds significantly oversubscribed thanks to this demand. This creates the unenviable task of either scaling back commitment sizes or turning away investors – something at odds with building new LP relationships.
Christiian Marriott, head of investor relations at continental mid-market shop Equistone Partners Europe, had to navigate this environment when leading the firm’s efforts to raise its sixth flagship vehicle in late 2017.
Fund VI was London-headquartered Equistone’s third vehicle since spinning out from Barclays Private Equity in 2011. With two fundraises under its belt and a track record as an independent player, the firm saw an opportunity to diversify its investor base.
“It’s not that long ago that it took two-and-a-half years to raise our spin-out fund,” Marriott says. The firm closed Fund IV – its first as Equistone – on €1.5 billion in January 2013.
“So much of our 2012 fundraise was tied to our spin-out and involved a number of discussions that were specifically focused on helping investors get comfortable with our separation from Barclays. These weren’t even on the agenda for Fund VI because the sentiment in the market was that we’d firmly established ourselves as a successful independent firm.”
The firm was initially considering a €3 billion hard-cap for Fund VI when it opened the data room in November 2018 and engaged placement agent Evercore to help curate an investor base with more exposure to certain regions.
“The Nordic market was an important target for us: it’s got some very sophisticated investors and we were historically underrepresented,” Marriott notes. The firm attended around 40 meetings with potential new investors, mostly in the Nordics and North America.
“I went to Helsinki to see six investors and ended up with a commitment from the one that we really wanted. What Evercore wasn’t doing was taking us on a 200-meeting US roadshow over six months because it was never going to be that kind of raise – it was a small number of highly targeted LP conversations.”
UNDER THE MICROSCOPE
Equistone’s spin-out from Barclays had its advantages when meeting LPs. Potential investors in Fund IV had been focused on the new firm’s structure, governance and share of economics, meaning its data rooms in its initial fund included a line-by-line breakdown of carried interest and its personal GP commitment – something the firm carried through to later funds.
“There are still firms out there that are reluctant to discuss carry in anything other than a verbal meeting just before someone commits to the fund, but we’ve always taken the view that you should get it done up front as early as possible,” Marriott says.
“Our carry goes deep into the deal team and most people will receive it unless they have arrived very recently. We see that as one of our key strengths, so it makes sense to be upfront about it.”
The firm had several other cards up its sleeve. An independently produced reference pack of chief executive interviews from across Equistone’s current and prior portfolio had proved integral to raising Fund IV and it has increased the number of reference interviews with each subsequent fundraise.
Equistone also sought to negate any potential challenges associated with having its key personnel spread across offices in London, Paris and Munich by hosting more than 80 structured and ad hoc onsite due diligence days. The firm put staff on planes to ensure LPs unable to travel could still meet a selection of key staff.
“We’re not a particularly easy firm to get to know because we’re so deliberately spread out across our local office network,” Marriott admits. “Some quick fundraisings are done these days with two or three pre-set due diligence days in one place and if you can’t make it to those you don’t get to do any on-site DD.”
REINING IT IN
Equistone’s efforts saw it receive signed subscription documents totalling €3.8 billion. Most LPs looked to secure a potential increased allocation in the event of any investors dropping out, though none did.
“In Fund V we were still oversubscribed but the market wasn’t quite as hot and we didn’t have quite as much inbound interest, so we were able to give all but a handful of our very biggest investors an allocation that wasn’t too far away from what they wanted.”
Reducing allocations is a difficult task at the best of times. What’s more, the Equistone team decided against a €3 billion hard-cap around halfway through the fundraise.
“During the process we had a lot of discussion internally about the signal that €3 billion would send to our team, the market and our LPs,” Marriott says.
“While the difference between €2.8 billion and €3 billion is hardly significant from a deployment perspective, we didn’t want to change people’s perception of Equistone as a lower mid-market player. There was definitely a case for a larger vehicle but we throttled back from raising over €3 billion very deliberately because we wanted to show a commitment to not simply take all the money that was on offer.”
Keeping to €2.8 billion would require some sensitive discussions with LPs. Merrick McKay, head of Europe private equity at Aberdeen Standard Investments, was one of these: the firm committed €50 million across managed mandates, according to PEI data. “Christiian is very open and Equistone as a firm is on the more transparent end of the market,” he says.
“You never feel like you have to play games – he told us about wanting to expand their LP base and kept us informed throughout the process about what commitment he could give us and each of our various mandates.”
Technology also proved a useful tool: Marriott emailed a few LPs that were unhappy with their allocation an anonymised excel spreadsheet showing Fund VI allocations in the context of existing investor commitments since 2002 to demonstrate that it was applying a fair approach.
“Did we get exactly the commitment size we wanted? No, but it was acceptable, and they were completely open with us about what they were trying to do,” McKay adds.
Equistone succeeded in building relationships while keeping a lid on fund size. When it closed Fund VI on €2.8 billion in March 2018 it had managed to expand its LP base from 43 in Fund V to 56.