Fundraising: not as easy as it looks

Lyceum’s decision to raise capital deal-by-deal shows bumper headline figures do not tell the whole story.

One could be forgiven for thinking raising private equity capital is, for now, a simple and quick process.

Just look at the data.

At $411 billion, the total raised in 2017 was the highest since 2008 (you can download and play with the data here). Size records have been broken in every region, while the average fund raised last year was $754 million. In 2014 it was $508 million.

It isn’t just private equity that has had a banner year. Demand for private debt has allowed managers – many of which are established private equity firms diversifying into the strategy –  to raise $180 billion, more than any year since we started tracking the booming asset class.

The number of firms holding ‘one-and-dones’ is rocketing – a remarkable 43 percent of funds were raised during 2016 and 2017 without holding interim closes, according to Hamilton Lane – and the momentum continues. “If you are not there, it is gone,” says Ilmarinen’s Katja Salovaara about rapid fundraisings in our latest Privately Speaking.

Blue-chip firms are experiencing high demand. One LP tells us investors were “kicking the door in” to get into Bain Capital’s fifth pan-Europe fund, which is likely to be ‘one-and-done’ on around €3.5 billion in Q2.

What a time to be a GP.

Except that beyond the aggregate figures, not everyone is basking in glory. Lyceum Capital, a stalwart of the UK mid-market, shelved its plans to raise its fourth fund and decided to raise capital on a deal-by-deal basis, as we revealed last week. Fundraising had proved problematic, according to a source close to the situation, because a number of existing LPs were having internal issues that ruled them out of the new fund.

There is certainly truth in this; PEI spoke to one previous investor – which asked not to be identified – that had indeed experienced internal issues that prevented it from backing the vehicle. The European Investment Fund, which has been taking a bearish approach to the UK, is also among the previous backers.

But shouldn’t Lyceum, which has not underperformed, be able to refill a large hole in its investor base with ease in this buoyant market?

It is not that simple. The LP universe is changing and the capital that once found its way to the lower mid-market – particularly in Europe – is thinning out. Funds of funds, which were a staple of this segment, are raising less money. Some have merged or been acquired and shifted their strategies.

We are also hearing that many smaller institutions that would once have accessed this size of country-specific fund have concluded they can generate the same returns on a better risk-adjusted basis (and with less admin) by committing to larger regional players. Those with mature portfolios have their time and capital accounted for by re-ups with existing managers, while those looking to build up their PE programme have the option of an ever-deeper secondaries market.

The difficulties in the mid-market are best illustrated by the time taken to raise capital. For funds of over $5 billion in size, the average time taken to reach a final close dropped dramatically from 12 months in 2016 to eight months in 2017. For funds smaller than $1 billion, the average time actually increased from 11 to 13 months.

An elite group of mega-managers is making fundraising look easy. It often is not.