It should be gratifying for general partners that none of the placement agents interviewed by this reporter could be reached at their office. Regardless of the time of day or day of the week, each and every one was on the road, be it South Africa, Boston, Geneva, Sydney or simply sitting at an airport between flights or driving to their next appointment.

While constant travel is business as usual in the placement game, it's also indicative of shifting LP goal posts courtesy of credit market dislocation.

These are some of the more sophisticated investors in the world, but at the end of the day they are human and it's natural to feel a little bit of fear

Dan Vene

“Generally speaking, our investors are supposed to be long-term focussed, diversified, institutional managers of money, which means that they have a pie chart that they live by,” says Dan Vene, a US-based vice president at placement firm CP Eaton Partners.

But slices of the pie seem to be fluctuating based on current market events, he says.

“There's a lot of deer-in-headlights reaction going on right now,” Vene notes. “These are some of the more sophisticated investors in the world, but at the end of the day they are human and it's natural to feel a little bit of fear when you see something like Bear Stearns drop 50 percent, when you see Carlyle walk away from a huge fund that they sponsored. You have to think to yourself, ‘Well, maybe I'll just sit on my hands for a quarter or two’.”

The slowing of exits and recapitalisations that typically result in distributions for limited partners, coupled with equity market volatility affecting other asset classes and ultimately an overall portfolio, also means many large institutional investors with mature private equity programmes will suddenly find their programmes over-weighted.

“The go-to accounts predominantly in the US and the larger accounts in Europe are shut down for the time being because of the allocation issue,” says Michael Hoffman, founder of San Francisco-headquartered advisory firm Probitas Partners. “For the largest funds, or any fund over $1 billion, if you're seeking expansion of the prior capital base, or even maintenance of the prior capital base, I think you're going to have people travelling to Australia or to the Middle East or to Asia to try to backfill some of those LP positions – or wait around for a year and a half to two years to raise the fund.”

Mounir Guen, founder of London-headquartered MVision, also says the over-weight allocation issue will slow down commitments to mega-funds.

“The last couple of years, there was a lot of liquidity in the market, a lot of cash back, so you saw regular billion-dollar commitments being made to funds,” Guen says. He estimates that those who were making the billion-dollar commitments are now more likely to make $300 million or $400 million commitments. “It's still a substantial amount of money, but it's not $1 billion, which means the mega-funds will probably not hit the targets they wish unless they stay in the market longer.”

I've seen some of the larger agents come down in mandate size, so some of the bigger folks who [previously would only place] $1 billion-plus funds, maybe they're looking at $500 million-plus size funds

Terence Crikelair

Sources say investors are finding it harder to differentiate between funds and identify those whose strategies remain dependent on liquid capital markets, says Charles Daugherty, managing partner at Connecticut-based Stanwich Advisors.

“We have heard a number of investors say they will not re-up with all their mega-funds,” Daugherty notes.

This is also to do with the apparent undermining of the prevalent post-tech bubble rationale of taking a “safe” bet on the mega-buyout segment, says Loren Boston, managing director with Merrill Lynch's placement group.

“As market conditions improved in 2004, investors started to regain some liquidity because the equity markets had rebounded, valuations had improved and cash started to come back into investors' pockets,” Boston explains. “As that occurred, the perceived safest segment of the market to invest in was the large end of the buyout market, and the global funds in particular.”

It was considered a flight to quality, as investors equated quality with size, he says.

“If there's one axiom that's true in private equity, it's that segments of the market that are undercapitalised tend to outperform and segments of the market that are overcapitalised tend to underperform,” Boston says.

Hoffman notes that LP reluctance to re-up at the same rate as in previous years with such funds has much to do with returns.

“If the mega-buyout fund train kept rolling down the track generating 45 percent returns, there's no question [limited partners] wouldn't have taken their eye off that ball and would have continued investing in that space,” he says. “The fall of that space – or the reality that it's not perpetual and it's actually going to be difficult times – I think is forcing people to more holistically approach their portfolios and rationalise what they're going to do in the next 5 to 10 years.”

“We have seen a pretty dramatic shift away from large funds to the middle market, and in addition to that, in '08 we've seen people be pretty accepting of more specialised strategies,” Boston says. “That's normally what happens when the market's in good condition – people are more accepting of strategies that are outside your plan vanilla buyout fund, and they [also] begin to look for distressed or credit strategies.”

Emerging markets, infrastructure, mezzanine, speciality credit and distressed debt and equity funds are all in high demand, market participants agree.

Vene notes that India- and China-focussed vehicles continue to attract high levels of investor interest. Despite talk of each market beginning to be “frothy”, the GDP growth fundamentals driving them remain incredibly strong, he says.

“Maybe China slows down, but if it's doing 12 percent GDP today, maybe it slows down to 8 percent or 9 percent – it's still four or five times what the US is going to do this year,” Vene notes.

Funds looking to target different pieces of the capital structure, and play up and down the balance sheet, are also gaining ground.

“Whether you're talking about distressed corporate or traditional real estate opportunity funds or leveraged buyouts, everybody who was looking for maximum deal enhancement over the vintage years of '04 to '07, they're now much more interested in capital preservation or what we consider more of a risk-adjusted approach,”Vene says.

Hoffman likens today's environment to 2002 and 2003, “when the market was having a difficult time and we raised maybe more esoteric funds that today have become more mainstays”.

En vogue these days are US and European mid-market funds, particularly those with a specific sector or operational focus.

“I think operating skills and the management teams at these firms becomes increasingly important as, obviously, financial engineering is no longer sufficient,” Daugherty says. “Operating experience specific to an industry is the most relevant and that remains very important.”

Placement agents stress it's hard to generalise as to whether the time it takes to raise a fund has changed because of credit conditions – in some cases fundraising has accelerated, in others it has slowed. Vene notes the answer is often sponsor-specific, while Guen points out geographic differences and Hoffman observes variations based on funds' investment strategies.

“I think anything that's vanilla, where people already have some in their portfolio and you're asking them to take on more, is going to be inherently frictional and difficult. The wild card in all of this is really what's happening with sovereign wealth funds and whether they can be the backfill,” Hoffman says.

The crucial thing to remember, Guen says, is that popularity is not synonymous with performance.

“You could have a fund that takes three months to raise or you could have a fund that takes three years to raise – the three-year fund could outperform the three-month fund very easily,” Guen says. “At the end of the day, the only [differentiating] dynamic about the three-month fund is it has existing investors and a very healthy re-up rate.”

He added: “But if you're going out with a first-time fund in today's market environment, it's going to take a while. Just resign yourself to being out there for 18 maybe even 24 months. But don't forget, there is no correlation between your performance and your fundraising time.”

While all of the placement agents interviewed say tougher market conditions and shifting LP focus have not impacted their business models, some suspect their competitors might have a different answer.

“I've seen some of the larger agents come down in mandate size, so some of the bigger folks who [previously would only place] $1 billion-plus funds, maybe they're looking at $500 million-plus size funds,” says Terence Crikelair, managing partner at Connecticut-based Champlain Advisors.

“I think that's definitely the case,” agrees Hoffman, “but I'm not sure that they weren't looking before, I think they were probably just more mercenary in their pricing and probably ended up doing fewer of those when they could do the bigger opportunities.”

Hoffman suspects some of the investment bank-affiliated groups are “hung with albatrosses”, or mega-funds that are now difficult to raise, and as a result “need to hit the revenue numbers and fill the pipe up with smaller funds if that's what's available in the market”.

Boston notes: “Our fundraising business, at least at Merrill Lynch, is extremely strong. We're seeing good reception for the funds we're marketing.”

He adds that “almost all placement agents seem to be doing well” but he is concerned about investment pace later in the year, when he thinks credit market turbulence will affect investors making decisions based on cash-flow rather than predetermined allocation strategy.

“Look,” Guen says when asked about partial versus full mandates, “it's a fragmented, massive market with a huge number of opportunities, so the net result is you see everything, there's everything out there.”

Adds Crikelair, “There are so many funds out there, I think there are plenty of opportunities to go around.”

But despite the mountain of opportunities, unlike similar market cycles in the late '90s and post-dot com crash, Hoffman observes there hasn't been an abundance of newcomers, or two- and three-person placement shops suddenly popping up.

“You can't just put a flag down and say ‘We're a placement agent’, like you could in the '90s when all the institutions just needed more of everything, and in '02 when everybody was surging capital back in after a quiet period,” he says.

“I think this time it's different because the shift of capital requires you to have more of a global footprint to be competitive,” Hoffman says. He also notes that the business has become more complicated, as institutions with mature programmes require different products for their portfolios and have become more selective as to whom they interact with.

“I think that actually benefits the incumbents today,” he adds.