The incredible shrinking GP

In March, it emerged that Apax Partners had cut 10 percent of its staff, closed its offices in Southern Europe and reduced its office space in London, according to a source familiar with the matter. 

The cut-backs come as the firm (which declined to comment) attempts to raise Apax VIII, which still officially has a target of €9 billion – less than the €11.2 billion its predecessor accumulated. “The world has changed since 2007, so it is unrealistic for firms to raise funds of the same size as during the boom years … Some players will have to reduce their resources,” the source says.

It’s not the only firm scaling down. Permira and Vestar Capital Partners are just two examples of firms that have cut internal resources in anticipation of raising smaller funds this time around.

This sort of ‘restructuring’ can work, according to Mounir Guen, chief executive officer at MVision Private Equity Advisers. “Back in the 2000s, a number of firms successfully restructured,” he says. “They had difficulties for various reasons due to internal succession or some other circumstances – [so] they made their firms smaller and re-earned the trust of the investors. It’s like going through a health cure: you become leaner; you focus on what you excel in; you stabilise and perform.” 

However, LPs are bound to be wary. “There are two questions when it comes to shrinking,” says Mario Giannini, chief executive of Hamilton Lane. “One: how are they shrinking? Are they getting rid of some good juniors so the seniors can keep their money? And two: are they just getting rid of people but not shrinking in terms of deal activity? You’ve heard GPs say, ‘we’ll never do big deals again, we’re going back to our roots’. That’s not as easy as it sounds. If you go back to [your] roots, you’re a different firm already.”

Maintaining deal sizes in a smaller fund means marginal deals don’t get done, according to Kathleen Bacon, a managing director at HarbourVest – so pricing should be more disciplined. But there could be pitfalls too, she says. “Some managers have said they will invest the capital faster – so instead of six years, they will do it in three. I am not sure that’s the right answer.”  

Another issue is whether GPs are sufficiently prepared to scale down. “In 2008, 2009, I asked GPs whether they were putting part of the management fee aside for a rainier day, and some said they weren’t,” Bacon says. “Anybody could see in 2009 that the future would be very different. And to not think about it or prepare for it is just general bad management, in my view – because you still need to retain the up-and-coming investment professionals and incentivise them.” 

Nonetheless, LPs are likely to be forgiving as long as GPs deliver performance. And managers who have restructured may be particularly motivated to do that, says Bacon. “The people who are running those funds will have a point to prove. There is some envy out there because there are some funds that are raising the same amount of capital or 30 percent more than during the last cycle.” 

And the cycle can turn quickly, as she points out. “These funds that did raise more capital need to perform well, because otherwise they will lose market share next time around.”