Is it clear that the fundraising climate in Europe is improving?
Yes and no. In theory, yes, because the situation has really improved from the post-crisis years. The crunch meant that there was a huge overhang of capital which was not invested because GPs became very prudent. At Acanthus, we have been tracking this capital overhang: in the crisis years it was about €190 billion, now it’s about €100 billion.
But fundraising has become more selective. The performance of GPs has been fluctuating because the bad economic weather has sorted out the good from the bad. LPs have [also] become a more complex animal: they have much less fund of funds [exposure] and much more individual mandates. So I believe the best funds will still raise – but there will be more bifurcation.
Funds seem to be spending a lot more time pre-marketing. Are GPs making greater use of this than they did during the boom years?
Since I have been doing this job, you have always had funds that raised in just three or four months. I definitely think all GPs do more pre-marketing these days. It makes a lot of sense to do this, but only if all the other conditions are met, such as great performance [and] no team turnover issues – all the things that investors look at. All things being equal, if you do pre-marketing and you do it in the right way, it definitely helps. Ten years ago, very few people could afford big investor relations teams or placement agents; now everyone does it.
Do LP have specific requests in today’s market compared to the pre-crisis fundraising climate?
There are two things LPs pay more attention to: economics and investor protection clauses. LPs have become stricter on management fees and transaction fees. They want to look at the budget and see where the money is being spent. There’s definitely more attention to this. The GP commitment is also quite important. It used to be about 1 percent, now it’s more ranging between 2 and 5 percent. There’s no set rule, but if a GP has been successful for many years, the LPs will expect the GP commitment to be higher.
In terms of investor protection clauses, the two main things are key-man clauses and no-fault divorce. The key-man clauses have always been there, but because the climate was smooth, people didn’t really look at them in great detail and didn’t negotiate very hard. They are looking for more control when it comes to these clauses [such as] automatic suspension when somebody leaves and [they] want more people included in the key-man clause.
During the euro crisis, North American LPs were particularly cautious about investing in Europe. Is this sentiment changing?
I would distinguish Canada from the US. Canadian LPs never really stopped investing in Europe. For instance, there were Canadian investors in one of our clients’ latest funds. US investors, on the contrary, completely stopped. Partly because they had their own liquidity issues, and partly because they just felt very cautious about Europe because of the euro crisis. Their overall message was that they were prepared to invest in the US – and if they were looking for higher returns and more risk, they would look at emerging markets like Brazil, China and other parts of Asia. They felt that Europe wasn’t attractive because the economies just weren’t growing.
Americans are looking more again at Europe, but more in Northern Europe, like the UK and the Nordics. We have seen Nordic and German funds attracting more American commitments in recent months, so it has been slowly picking up again.