On the Record: SL Capital Partners' David Currie

PEI: Is access no longer a selling point for FoFs in the current climate? 

At the smaller end of the market, access is still very much an issue. It’s not so much at the big funds, because these days, they don’t tend to be that over-subscribed; some people who may have previously used a fund of funds to access large funds have been able to get in direct during the past few years.

But for sub-£1 billion funds, quite often they are over-subscribed. Usually they’re not increasing the size of the fund – but if their performance is strong, they’ll have happy and loyal investors who will take up all their available allocations. So there is very limited availability for new investors.

How can a fund of funds solve that problem?

What we do is to work hard to try and identify attractive managers, well ahead of the time when their funds come to market. In other words, we try to secure a position well ahead of the fundraise, rather than waiting around for the PPM. That way, even if you’re not completely ready when they come to market, you’ve covered a lot of the preliminary stuff: you’ve been able to form a pretty good view of what the strategy is, who’s in the team, how their portfolio companies are doing, to what extent they add value and so on. 

If you’ve managed the relationship properly, you can absolutely secure a position. There have been a few times in the last year when we’ve been the only new investor, or one of the only new investors, to get into an oversubscribed fund. 

Are you getting squeezed on fees at the moment?

I think people in general are more sensitive to fees at the moment. They’re scrutinising all these things more than they have done historically – as, to be fair, are we as a limited partner. But it’s no more than you’d expect at this stage of the cycle: the balance of power swings towards investors rather than managers, and this can actually lead to long-lasting change. We’re certainly seeing more discussion around that, particularly for institutions with substantial amounts of capital to invest: the view is that if they’re of a certain size, they can demand a discount. If they’re putting in £100 million, is it reasonable for them to pay the same fees as everyone else?

Are you also seeing more demand for customised accounts?

These developments certainly encourage people’s inclination to be a bit more specific about what strategy they want to pursue. But that presents challenges for the LPs themselves. If you give someone a blank sheet of paper, and say ‘Describe what you want’, people might find it difficult to know precisely what they want.
If there’s unlimited choice it’s about getting people focused on what they really want. Of course we can give them a steer in this process – maybe they want this part of Europe, but not another part; perhaps they want to be in more big funds, or no big funds at all. And then we can spell out how we think about how it might be done, in terms of the number of the funds perhaps, or the number of co-investments.

Is further consolidation within the sector inevitable?

The real challenge for sub-scale fund of funds managers will be all this new regulation. If you’re a small manager, and your fee income is only just covering your costs at the moment, you probably won’t be able to staff up to deal with AIMFD (for example).  So then you have two options: either you raise a bigger fund, which is going to be really tough at the moment, or you can increase your fee, and there’s going to be lots of resistance to that.  So I think consolidation is likely to happen. We’re starting to see some strategic deals already, like Carlyle buying Alpinvest, and I think we’ll see that continue.