Equistone on LP appetites, Brexit and pricing

GPs should be willing to consider more complex deals amid growing competition for assets in Europe, according to Guillaume Jacqueau, managing partner at Equistone Partners Europe.

Jacqueau’s comments follow a first and final close on €2.8 billion for the firm’s sixth flagship fund, two months after Private Equity International reported it was eyeing an early March close on the vehicle.

More than half of the capital raised came from institutional investors across Western Europe and the Nordic region, with a further 28 percent and 16 percent originating from North America and the rest of the world respectively, according to a statement. Pensions represented approximately 46 percent of Fund VI, up from 35 percent in its predecessor, Jacqueau told PEI.

PEI spoke to Jacqueau and head of investor relations Christiian Marriott to discuss the challenges associated with soaring limited partner demand for the asset class and an investment environment that is fast overheating.

How do you handle a significantly oversubscribed fund?

CM: If we had taken the maximum allocation offered from all 56 investors, that would have totalled €3.8 billion. There is a lot of liquidity in the LP market and a lot of desire to concentrate bets with a smaller group of managers.

Managing that excess demand is probably the most challenging part of the fundraising process. A very common conversation with an LP is that they’d like to give you X amount, which is a significant increase on their commitment to the previous fund, but don’t want you to raise too much money and become ill-disciplined.

You don’t want to raise a fund that involves taking all the money on the table and to do that LPs need to be measured in their appetite. We need to establish a basis that they’re comfortable with and makes sense for their programme, but where we’re not being pressured into raising a fund size that we’re not comfortable with.

We need to treat people fairly, not just because it’s the right way to do business but investors have long memories and if you’re arrogant or showing hubris and then trip up in any way they’ll clearly have that in their memory.

Did Brexit play a role in fundraising discussions?

CM: I don’t think any investor who supported this fund managed to have a meeting with the UK investment team and not mention Brexit, because clearly it’s a factor. Our position during the fundraise was that the UK buyout market will probably have a three- to four-year horizon that is difficult to predict because there’s so many macroeconomic and political variables.

The challenge for LPs is that the UK is typically about half of the PE market in Europe in each year, so do you ignore that because of Brexit or pick a couple of UK managers that you’re hugely comfortable with and back them because you’re bullish on Brexit? For many LPs the European approach is the sensible way to manage that risk.

We don’t have a top-down country allocation, so if the UK PE market proves very difficult to navigate we’ll have the ability to put a bit more money to work on the Continent and a bit less in the UK. It’s not that dissimilar to what happened when the buyout market in France really choked in 2012. Fund IV [a 2011-vintage] ended up putting less than one-third of its capital into French deals, but as it happened those have mostly performed exceptionally well.

Do you have any concerns about deploying capital in this environment?

GJ: The market is very competitive and valuations are under pressure, which leads us to be selective. The way we try to address it is that we work on classical auctions and plain vanilla deals, which we have to pay full price for, but also on more complex transactions. In a very challenging market we are willing to work on those and have proven that these situations can be turned into successes.

The main challenge with these is not the valuation, it’s the complexity. [Tourism group] Karavel-Promovacances in France is a good example; it’s a business that has been through a lot of difficulties but which we believe can deliver a nice rebound in performance.

We have to find the right mix between classical deals and more complex transactions. Our strategy is to be opportunistic and also be ready to occasionally do [the latter].