Danske Private Equity find GPs are pushing back

Danske Private Equity Partners VI closed on its €700 million hard-cap last month, having held a first close on €603 million in April 2015 and was essentially closed to new investors by the summer. 

While there are plenty of interesting opportunities in today’s market – the vehicle, targeting just 15 funds, is already 40 percent deployed – with the balance of power tilted toward the GP, investors are faced with increasingly aggressive fund terms and frustrating GP behaviour, says Danske principal Jesper Knutssøn.

How does Danske differentiate itself?

I think one of the most important differentiation factors is this specific fund-picking attitude in the lower end of the market. Each of our fund investments will have a significant influence on our overall performance. Most other competitors would have a broader portfolio of, say, 30 to 50 funds, and we believe this is too many. We believe that over-diversification will tend to give you average or median returns. We expect to make strong returns, and that our fund picking – not having more than 15 funds globally – will give us that result. 

How do you rate manager quality in your segment of the market today?

We actually think there are a lot of good opportunities in the market just now. There are a lot of interesting fundraisings. The problem is not so much the availability; it’s the very, very aggressive terms that some of these GPs put out to the market. We feel quite challenged by some of these setups – they could be even re-ups – that suddenly throw things at us which are not acceptable in terms of fees, carry and hurdles, and excessive fund size, and extra funds with no relevance to the main funds etc. Everything, basically.

What are some of the more extreme terms you’ve seen?

I’ve seen up to 50 percent carried interest, and I’ve seen worse than that. Also I’ve seen hurdle rates being pushed down to zero. I’ve seen fund sizes trebling. There are all kinds of horrendous examples of bad behaviour and lack of discipline. It is true that the GPs have the upper hand in the negotiations currently. It’s difficult to get access, difficult to get an allocation, and LPs have to live with that, or they have to decline. Which we do, actually, quite frequently.

It is extremely frustrating when funds exceed their hard-caps, because we’ve kept our size for 15 years. We do that because our strategy says we must do so. We could have raised more money if we wanted to, but it wouldn’t be in line with deploying the capital in the best way possible for us. 

This is exactly the same thing that goes for the GPs we see in the market. When they triple their fund size, how can they claim that nothing changes and that they’re easily able to deploy the capital in the same way they used to? It simply doesn’t add up. So returns will probably come down due to this, and therefore sometimes it will be time to say ‘no’ and find a new GP to support. 

How about Danske’s fund terms?

Danske’s terms are quite cheap, I think most people would say. We have a very competitive management fee and a carried interest scheme with a high hurdle rate.