Experienced dealmakers leaving their firms to raise their own funds are still relatively rare in Europe. If two current offerings do well, others may well decide to follow their lead
“Wanted: best-of-breed investment manager spinning out of an established private equity group armed with new ideas and hungry to make a pile of money for themselves and their investors.”
Potential first-time fundraisers don't come across this sort of message in institutional investors' shop windows often enough – which would explain why, in Europe at least, the number of successfully raised recent debut funds is relatively small.
“New groups please” may be a mantra that many LPs profess. But the reality is that when it comes to writing cheques for an emerging manager, regardless of how credible they may be, many investors fall back on the view that it is better, or at least safer, to let these managers emerge first, track their progress and then give them money next time round – probably.
Awareness of this kind of mindset must be a major factor when dealmakers eager to break loose from existing general partner groups are trying to decide whether or not to take the plunge and start their own business. Market observers are speculating just how many senior figures at leading European buyout houses are currently in this position.
The attractions are obvious and extend beyond economics. Personal ambition may play a role as well: just imagine a senior figure or even team whose firm has just completed its succession planning and who didn't make it to the front row. Having been passed over (at least in their eyes), is it really worth their while to stick around?
Perhaps not, provided they have enough drive, investment acumen and charm to persuade enough investors that theirs is a must-have proposition that fills a gap in today's market.
The fact that a handful of newcomer groups have recently pulled this off must be encouraging. There's Manjit Dale, the former DB Capital Partners man, whose new firm TDR is thought to be currently nearing its €500 million fundraising target. Other examples are Dominic Shorthouse (Englefield, formerly Warburg Pincus), Hans Albrecht (Nordwind Capital, formerly Carlyle) and perhaps most notably Harald Mix (Altor, formerly Industri Kapital), who also succeeded in forming new teams and putting their names onto Europe's private equity map.
In the US, the list of relatively recent start-ups that have managed to establish meaningful franchises is longer: Silver Lake, Francisco Partners, Madison Dearborn, The Cypress Group, Audax Group, Heartland Industrial Partners, New Mountain Capital and Traverse Partners to name a few were all established by individuals or groups who prior to going solo had already enjoyed successful careers at other partnerships.
Just how many more Europeans will break out of bigger firms armed with a compelling investment case depends to some extent on what happens to two high profile groups that recently made the leap and are currently fundraising. One is Balmoral Capital, set up by CSFB Private Equity's former London-based veterans Richard Winckles and Alec D'Janoeff. Their group is looking to raise €600 million for a pan-European buyout strategy.
The other test case, albeit one with a different background, is Exponent Private Equity, the buyout team whose recent departure from 3i is thought to have hit the latter's own buyout fundraising at a time when it could least afford it.
If limited partners commit and hence give these two ventures the stamp of approval, other private equity people with an entrepreneurial itch to scratch will find it far easier to persuade themselves it's now or never.
However, should Balmoral and Exponent land less than they hoped for, then these people are more likely to take the more conservative view that being a partner at an institutionalised private equity operation with a long-term future isn't such a bad thing after all. And this might well mean that few new groups will appear in the market for more than just the short term.
It's up to the buy side which scenario they prefer. Tried and tested versus new and fresh: investors assessing current investment opportunities could be setting the tone for some time to come.