Quality and quantity: The attractions of US capital

When discussing fundraising in the US, it is worth noting that although European funds have attracted considerable amounts of capital there, funds originating in both Latin America and Asia have also benefited. In these latter cases the importance of US money is usually pivotal. Whereas most European general partner groups have been able to originate a significant proportion of their funds' capital from domestic investors, Asian and Latin American funds have by necessity had to look outside their home markets from the outset. That means the US market has been their first port of call and as a result a growing number of funds from both regions are being expressly developed to suit US investor appetite and attitudes. Recent Asian LBO-themed funds are a case in point. This trend is particularly apparent when placement agents have worked on the proposition with the GP groups, as they will have helped tailor the offering to suit the target audience.

Long-term money
In contrast to private equity groups in Asia and Latin America, European firms have always had domestic pools of capital that could be accessed. The nature, as well as size, of these pools has helped determine which countries' private equity firms have looked most readily to the US. Mounir Guen, CEO at placement group MVision comments: “For some continental European funds you would often find a disproportionate amount of local money in them: French money would fill French funds and likewise Nordic money would do the same to Nordic funds. In both these cases the money was usefully long term.”

Guen makes the point that different countries within Europe have seen different investor groups attracted to private equity. In the Nordic region, the life and pension funds have been key private equity investors, whereas in France it was the insurance groups who committed significant amounts to the asset class. In other continental European markets a different type of investor was often pre-eminent. “In Spain high net worth individuals (HNWs) have been key whilst in Italy you're seeing the banks play a vital role in an Italian fundraising.” In both cases, these investor groups are subject to different influences compared to those coming from the European pension and insurance industries. HNWs are inherently more volatile (their need for liquidity at short notice being a hallmark) and as a result can pose a greater risk to a fund's stability (secondary buyers have found this community a ready source of deal flow).

Banks meanwhile have been modifying their attitude to private equity investing as a result of Basel II capital adequacy rules: some of the largest bank investors have dramatically reduced their portfolio and many are predicting that others will follow suit. This has led some GP groups to ponder the longer-term implications of having a significant proportion of bank capital in their fund.

One country in Europe that has not yet been referenced is the UK, where a diverse and seasoned community of institutional investors exists. The logical assumption would be that UK private equity firms have been able to enjoy significant support from this domestic investor base. The reality is rather different. Says one UK GP who last fundraised in 2001: “Granted there is an interestingly large number of potential investors here in the UK, but you find the key groups – particularly pension funds – being very actuary driven and that has proved to be a major inhibitor in getting these guys to allocate any useful amount to us. The consultants don't know private equity and they don't recommend what they don't know.” In this context, the appeal of having a group of investors who can deliver sizeable commitments and who are not subject to medium let alone short-term vagaries is especially attractive. Says Guen: “The most advanced and therefore mature investment programmes are in the US. They have gone beyond the J curve and have seen very meaningful distributions from older vintages in their portfolios already. This makes them ideal investors: the capital is long term, is repeatable and supportive.”