Frequent flyers

In the new private equity fundraising reality, GPs are going to have to clock up a lot more air miles, writes Christopher Witkowsky

In the post-crisis world, most firms have discovered a new fundraising reality; their traditional sources of capital just aren’t going to provide the kind of dough they used to.

Many traditional US investors, such as public pensions, university endowments and foundations, have had problems during the downturn, and few capital raisers have high hopes for the amounts they will allocate to private equity going forward.

The relationship between the California Public Employees’ Retirement System and The Blackstone Group is a case in point. For the first time ever, the pension recently committed less to a new Blackstone fund than to its predecessor: it committed $500 million compared to $750 million in 2006.

While $500 million is still a huge amount, Blackstone has most likely received similar treatment from other long-standing LPs. The firm has accordingly lowered the target for its sixth fund from $20 billion when it first launched to $15 billion in early 2009. Media reports in the last month suggest that Blackstone will cap the fund at $9 billion.

Blackstone’s experience may not spell the end of the “big ticket”, but it does suggest that in the new fundraising reality LP commitments will be smaller and harder to get.

Unable to raise significant amounts from LPs close to home, more firms are leaving their old neighbourhoods and taking to the road – or the air – to beef up funds that have hit capital plateaus.

Freeman Spogli, a Los Angeles-based firm, is looking for the first time to raise a substantial amount of capital outside of the US. The fund started marketing its $1.5 billion sixth fund in January 2009, but has only been able to collect $450 million from its traditional investors, 95 percent of which are based in North America.


Freeman has also had concerns about a proposed US Securities and Exchange Commission rule that would bar placement agents from interacting with public pensions in the US, a source tells PEI. The firm has therefore embarked on an effort to attract money from alternative sources of capital, including investors in the Middle East and Asia.

“This is a good opportunity for limited partners in Europe, the Middle East and Asia to step into some of the best funds in the world,” one market source says.

Another firm, Amwal AlKhaleej, based in Saudi Arabia, is looking to raise SAR2.2 billion (€414 million; $600 million) for its third private equity fund. For the first time, the firm, which was created in 2004 by several powerful Saudi families, is looking outside the Middle East for investors.

Amwal AlKhaleej is looking globally for investors. Triago, Amwal’s placement agent, will be focusing its energy on building an LP base weighted equally between the US and Europe, with a further 20 percent coming from the rest of the world. This marks a difference with past emerging markets funds in which US LPs were often the most significant contributors.

Meanwhile, in Europe, even some longer-term investors in private equity are increasing exposure. Allianz, Europe’s largest insurance company, plans to substantially increase its investments in private equity, infrastructure and real estate. Allianz has about €8 billion in private equity investments.

The importance of China’s role in providing private equity capital is likewise growing. Sources tell PEI that the China Investment Corporation, with almost $300 billion of assets under management, is “hungry” for investments in private equity. Recent commitments to big-name firms like The Blackstone Group and TPG lend weight to this assertion.

Other players from around the globe are starting to make inroads into the asset class. The Z$14.9 billion (€7.6 billion; $11 billion) New Zealand Superannuation Scheme, which hired Hamilton Lane last summer to help it meet its 5 percent target to private equity, has committed to HarbourVest Partners, Coller Capital, Kohlberg Kravis Roberts and Apax Partners, among others.

Sovereign wealth funds, superannuation schemes, European pensions. The new reality for private equity firms looking for money is that GPs – even those who’d rather hang out in the old neighborhood – are going to have to spend more time in the air.