Friday Letter Strange days

Two funds closed above the $1 billion mark this week, while another private placement group bit the dust. Which is more reflective of today’s fundraising climate?

These are confusing times when it comes to fundraising.

Anyone and everyone will tell you it has become significantly harder to raise capital as limited partners continue to face liquidity and over-allocation issues. And that’s on top of the ramifications that would come from placement-related regulations being proposed in the US following a pay-to-play scandal. [Synopsis: Placement agents could be barred from interacting with US public pensions, some of the world’s biggest private equity investors.]

Global fundraising stats are grim – less than $100 billion has been raised this year to date, a staggering drop from a high of more than $500 billion in 2007, according to sister data provider Private Equity Connect.

It's also not difficult to find anecdotal evidence that the placement business is in turmoil, with Deloitte this week becoming the latest to call it quits. Citi and Merrill Lynch are among other groups that in recent months have confirmed they will halt or reduce placement activities. Meanwhile, individual executives – two at CP Eaton in the past two weeks, as PEO was first to reveal – are making moves of their own, furthering the industry’s dislocation.

Yet some private equity firms continue to target and raise significant sums. Just this week Unison Capital closed one of the largest Asian funds raised this year, rounding up  ¥140 billion ($1.47 billion; €1 billion). Meanwhile, TA Associates closed its 11th fund on $4 billion, surpassing its target by $500 million and completing the process – from PPM to final close – in just nine months.

“It wasn’t easy,” TA managing partner Brian Conway told PEO, noting that LPs’ liquidity and over-allocation matters were just a part of a plethora of issues complicating today’s fundraising environment. TA notably reduced its carried interest rate to 20 percent from 25 percent on Fund XI, a move that was widely seen as a lifeline thrown to limited partners.

“We just thought it was the right thing to do given the situation that LPs are in. And for [LP investment] committees, carry and fees have become a bit of a lightning rod – almost irrationally so, almost divorced from net returns and whether a firm charges management fees or not,” Conway said. “We don’t charge management fees and we manage less capital per partner than a lot of other firms and have good net returns, but … we could tell that this was an issue for our LPs.”

Conway is quick to stress that this LP-friendly move was not the main driver behind TA’s fundraising success – a 41-year track record, a mid-market growth strategy and a senior management team that’s been working together for nearly two decades also didn’t hurt.

But not every firm will have those exact same attributes when going to market with a fresh fund offering. So what’s a GP to do? Are more LP-friendly terms the way forward? Has the rationale for using placement agents changed? Are there alternatives to raising a traditional fund and under what circumstances does that make sense? Are mega-funds still saleable? What do LPs want and who has cash to commit?

PEO has arranged for a panel of industry insiders – all veterans of the fundraising business – to debate these issues and more in its next webinar, The New Frontier: How to raise a private equity fund in today’s marketplace. The goal is to engage PEO’s readers in the discussion, as well – this is your platform for education and discourse.

As this week’s news stories illustrate, now is an unprecedented time for private equity fundraisings and the professionals behind them. Do join us later this month to explore the best ways forward.