A long, hard slog

Limited partners, inundated with amendment requests over the past few years for everything from changes in the fund size to extensions of the investment period, have been getting hit with requests to give general partners more time to raise their funds.

One US public pension official recently said: “Over the past year, I have seen more requests to extend the fundraising period than in the [entire] decade before it”.

Another advisor source says the amount of fundraising extension requests over the past year resembles the time after the 2001 economic downturn. “Unfortunately, there are cycles to fundraising, as well as investing,” the advisor says.

Depending on the terms of the limited partner agreement, GPs will have a fixed period of time to reach final close – historically, 12 months. The GP must get LP approval to fundraise beyond this contractual limit.

LPs are usually amenable to granting GPs more time to raise their funds, except in situations where GPs have already hit their targets and are reaching for hard-caps. In these situations, investors may cut off the GP from raising more funds.

“Sometimes it’s in the LPs’ best interest to allow more time to raise funds, particularly if you want a diversified pool of LPs [in the fund],” one market source says. “And sometimes enough is enough. They just want the GP to get focused on investing the capital.”

The reasons GPs are asking for fundraising extensions range from the glaringly obvious – the macro-environment is such that GPs are searching far and wide to find capital, which means leaving the places they are most familiar and comfortable with in order to explore new regions – to the more obscure.

Private Equity International has been reporting that WL Ross & Company is having a tough time attracting investor support for its fifth fund, which launched in August 2010 with a $4 billion target. As of this past August, after a year in the market, the fund had only collected $450 million, according to filings with the US Securities and Exchange Commission.

The trouble the firm has been having getting LPs on board is a bit of a mystery, given that it has always generated excellent returns for its investors. However, sources have told PEI that LPs are concerned about founder Wilbur Ross’ future involvement with the firm.

Other firms that stayed in the market for long periods of time include The Blackstone Group and Lexington Partners. Both firms are highly respected by LPs; but both launched their fundraisings in 2008 and had to delay their timetables after the collapse of Lehman Brothers.

Others will not recover so well, however. In tough fundraising environments, even the slightest doubt about a manager can lead LPs astray, because they are looking for reasons to turn down a commitment request. LPs want their capital with top quartile managers; they want to know what they are getting when they pledge their money.

For example, one fund of funds official said that one reason fundraisings were taking so long (GPs can currently expect to spend an average of just under two years trying to close a fund) is that LPs need longer periods of time to perform the extensive due diligence they feel is appropriate before they make a commitment – partly because there’s so much more performance data to sift through these days. Because of this focus on greater due diligence, more LPs are declining to get into the first close and waiting instead until the end of the fundraising, when they can see a track record of one or two investments.

For this reason, some GPs this year have offered “early bird discounts” to LPs willing to commit before the first closing. The deals usually include some kind of reduction on fees; so far this year BC Partners and EQT Partners have both had notable success offering such discounts.

GPs are, of course, painfully aware of the challenges around fundraising, and some fear that they’re spending too much of their time worrying about raising capital. David Rubenstein, head of The Carlyle Group, lamented at a recent industry conference the increasing time GPs spend on the fundraising trail, which often includes multiple face-to-face meetings with individual investors.

But this seems unlikely to change any time soon. Since LP capital remains their life blood, GPs have no choice but to listen to and work with their investors – for as long as it takes.