Friday Letter: How you feelin?

Stepping through the doors of London’s Hilton Metropole hotel for the opening day of the 2005 EVCA Symposium, one was met by the soothing strains of the kind of background music so typical of hotel foyers the world over. By the end of the day though, delegates may have been more in the mood for the pounding rhythms of “Feelin’ hot, hot, hot”.  

And, true to form, it wasn’t London’s weather upping the temperature. It may have had more to do with the 700 or so attendees scuttling up and down the stairs and from East wing to West wing at a venue that was appositely described by one of the organisers as a bit of a “rabbit warren”.

But, fundamentally, the heat was synonymous with the current state of the LBO market (venture, of course, was running at its own temperature): mega funds; jumbo deals; aggressive leverage; intense competition – these were just a few of the talking points bringing a sweat to a number of GP brows.

There now seems a need to add another phrase to the mix as well: awash with capital. This was the backdrop to some illuminating discussions about the LBO fundraising market, which, as a corollary, examined the role of placement agents in a capital-rich environment characterised by a posse of would-be investors wanting access to some increasingly choosy funds. PEO eavesdropped on some animated debate at the Symposium; here are some of the more pertinent observations:

Avoid being in the market too long: Take longer than a year in today’s heady environment and a vague whiff of something unpleasant will begin to circulate around your fund. Three to four months from start to finish is the target du jour, with first and last closes ideally now identical. Pre-marketing is absolutely crucial – by which is meant having key investors effectively signed up and ready to go before you’ve fired the starting pistol. “Official” launches are increasingly meaningless.

With premium funds, European LPs are too slow to react: One motion that would surely have been unanimously carried had there been a vote was that elite US venture funds no longer have the room to themselves when it comes to slamming the door shut in the face of surplus capital. Now the best buyout funds can exercise the same privilege too. With an emphasis on re-ups and aggressive capping of fund size, there is frequently little space into which new investors can squeeze. It is a reality that some say European LPs have been slow to acknowledge, meaning they are oftentimes muscled out by their slicker, quicker counterparts in the US.

Placement agents I – still additive: Aside from ‘hot’, there is another regularly used tag for today’s fundraising market: ‘polarised’. For every home run fundraise carried out by a BC Partners or an EQT, spare a thought for those struggling to reach first base. The gap between the haves and the have-nots is widening. And maybe it’s not all down to the respective quality of the propositions: inherent in the hard luck stories is perhaps a simple failure to identify the most appropriate investor base. Step forward, the placement agent. Consider also the ‘special cases’: the small, domestic fund seeking international investors for the first time; the spinout lacking sufficient resource to handle fundraising internally; the firm seeking to persuade investors that its succession issue is not an issue. For all these and more, the placement agent is an essential part of the fundraising strategy.

Placement agents II – a new humility and sliding fees: So agents are still a major force. But perhaps a little more humble? PEO makes no judgement, but consider the following exchange. Delegate: “To what extent is an LP commitment accounted for by the quality of your [i.e. the agent’s] relationship with that LP?” Placement agent (anon.): “Not much. With families, maybe – but not on the institutional side.” (Cue sound of GP jaws dropping). There is also such a thing as forced humility of course – hence one GP’s reference to his firm’s “very performance-driven” agreements with placement agents in which fees reduce on a step-by-step basis for failing to attain promised meetings, secure promised allocations etc. Hard bargaining, it seems, is the order of the day.

And what of the future? As in all good forums of debate, opinion differed. Some felt that vintage deals completed between 2001 and 03 (and maybe 04) would generate sufficient momentum for the fundraising train to keep rattling along the tracks for a good while yet. Others spoke as if a new ice age was around the corner: high-profile deals will falter, the banks will reign back leverage, reputations will be shattered as returns plummet and the Four Horsemen of the Apocalypse will be seen attending numerous GP AGMs. In the heat of the Metropole though, such talk seemed strangely out of place.