Alicia Cooney, Boston-based partner at global placement agent Monument Group, talks to Private Equity International about fund raising for mid-market firms, larger limited partner allocations to smaller funds, how general and limited partners negotiate fees, and changing economic models.
Are funds raising capital in the lower mid-market being squeezed?
I’m not really sure that is an issue anymore. In the 25 plus years that I’ve been in the space, what we have really seen is that investors of even a moderate size, as long as they’re sophisticated, are really quite comfortable with making a large allocation to a small fund.
If they get there early and find these gems, they’ll be willing to take an outsized allocation of that fund, so they can have fewer managers and be significant while still playing in the smaller end.
These types of investors have been in it for a while. As one investor said to me, “I don’t have to worry about diversification for this portfolio as I’ve got a multi-strategy diversified portfolio.”
What it comes down to is this: if they’re smaller funds, they’ll get funded fast. We’re raising a fund right now and we had someone commit $50 million last week. These smaller funds that are getting raised quickly with large commitments.
The kinds of investors that we call upon don’t spend a lot of time thinking about quartiles. It’s a secondary factor. People are looking at multiples and distributions; they’re looking to see what the returns are.
What issues arise between mid-market funds and their investors?
The funds that are in the mid-market will have issues with limited partners if they’re not providing a set of terms that, taken together, are collectively marketed with a fair combination of management fee, fee offset and carry. In addition, they will want to see transparency to understand the GP’s economics.
In many funds that we work with, the fees are quite reasonable and not the type of private equity funds that are egregious. For the larger funds that close over $1 billion, they are very much attuned to the fees.
The GPs that we’ve been talking to are pretty comfortable about being transparent because they feel they haven’t done anything wrong. I think if they do feel comfortable with their practices then they should list out the fees they charge so investors will tend to agree with them in terms of fees and allocations.
It can be an advisory fee, a monitoring fee and the most egregious, which can be where the company owes the fund a monitoring fee of a very sizeable portion for multiple years even after they sell the company. The general partner’s view is that a deal was a deal. If somebody was willing to pay for it, there you have it.
LPs are being reasonable as long as they feel like they’re being treated respectfully regarding the terms and are recognised as sophisticated investors.
Has the debate around fees changed the negotiation process?
I wouldn’t say that it’s changed the negotiation process. What we are much more careful about is being sure that, before we go to market with a GP, we understand the way they get their economics.
We say, let’s go through your budget and show us how you need these fees, so, that when we’re asked, we have an answer.
I don’t think we’ve come to blows with anybody on this. It’s more of an evolutionary process when you’re fundraising. Before somebody really commits to a fund, they’re going to want to understand how you manage their business.
What other trends in the fundraising market are you noticing?
One of the things that everyone is talking about is co-investing and going direct. All the LPs love it because it allows you to lower your fees for the same number of deals. I’d be really interested to know if it’s really happening and working.
One other thing we’re seeing with the larger funds is separate accounts and various types of pledge funds.
Has the economic model of fees and carry gotten to the point to say it’s time for a different model, like saying, ‘pay a budgeted management fee and ratcheted carry’?
I think that over the next 20 years there will be multiple ways of delivering the same private investing strategy to different investors, using multiple structures and economic terms.