Friday Letter Even placement agents can’t stem this tide

Exactly how severely the wild public market swings and various financial sector government interventions worldwide will affect private equity activity remains to be seen. But their impact on fundraising can already be felt.  

Equities traders are not the only ones with their heads in their hands these days. Private equity placement agents, while a forceful bunch still extremely bullish on private equity, are increasingly reporting a slowdown that is out of their hands.

Many institutional investors that have been private equity’s largest supporters are now faced with shrinking assets and slowing realisations – and as a result, over-weighted private equity programmes.

This so-called “denominator effect” effectively means commitment sizes are shrinking. Investors who in the past would have written $1 billion tickets might now make $300 million commitments, which will result in some larger funds having difficulty reaching targets, says Mounir Guen, founder and chief executive of London-based placement agent MVision. As a result, some funds will delay closings and GPs will be less likely to return to market as quickly as they have in past years, says Thomas Kubr, CEO of Switzerland-based alternatives advisor and investor Capital Dynamics.

That’s not all. Some fund sizes will drop, and Brazil- and Russia-focused funds may lose popularity, predicts Les Fallick, a managing director at Sydney-based placement agent Principle Advisory Services. GPs overly reliant on leverage will flounder, says Annette Wilson, investor relations director for London’s Palamon Capital. Urs Wietlisbach, executive vice chairman of Swiss alternative asset manager Partners Group, expects all of these factors to cause certain LPs to negotiate terms and conditions.

But despite the warning bells industry figures – and LPs themselves – are sounding about a lack of liquidity, fundraising successes have not become extinct.

Spring Capital Asia is more than halfway towards its $200 million target for its debut fund focused on SMEs in China, while Japan’s Unison last week held a first close on nearly $1.2 billion for its third buyout fund, targeting $2 billion.

This week, it emerged that Dubai-based Abraaj Capital has received substantial re-ups from existing LPs to the tune of $3 billion for a first close, putting the firm closer towards its $4 billion goal for Fund III. Abraaj is therefore on target to close the region’s largest fund ever raised and one that is eight times the size of its second buyout fund, which raised $500 million in 2005.

However, making smaller, or in some cases zero, commitments as a result of current global financial turmoil is also a prevalent trend among Middle Eastern limited partners, cautions Edward Frazer, founder and chief executive of Trinity Group, a London-based placement agent that specialises in raising capital in the Middle East.

“We get so many calls from so many people thinking that going to the Middle East is Nirvana because of all their liquidity,” he recently told sister magazine Private Equity International. But aside from the glut of product that has come on the market – Frazer estimates more than 600 emerging markets funds alone are being pitched to Middle Eastern investors – factors like the drop in oil prices, the disastrous financial sector bets some sovereign funds took, and tanking global equity portfolios are impacting budgets and investment committee decisions there, too.

These are “strange days”, many people are saying – and placement agents, even the most successful ones, are no exception. Expect their prosperity to continue – but more slowly and scarcely than they have in the past.