The re-up rodeo

The fundraising environment in 2011 will continue to be dominated by firms coming back to LPs seeking repeat commitments. It could be a bumpy ride, writes Christopher Witkowsky

The story of the private equity fundraising environment this year is existing relationships: limited partners are, for the most part, dealing with a glut of managers already in their portfolio coming back to market seeking capital.

One official at a large US public pension says the institution expects up to $6 billion of re-up requests this year, and “we’re likely to do a third of that”. The official’s pension will certainly be actively investing (“we’ll put out more capital this year than the last two years combined,” the official says), but “there’s no way we’re going to put out that sort of capital,” the official adds about meeting all the re-ups this year.

This presents a challenge for both LPs and general partners. On the GP side it has everything to do with the manager’s ability to raise a new fund. In this environment, if you can’t attract a significant amount of returning capital from prior investors, you’re in trouble.

If you’re an LP, you have a lot of work ahead of you sifting through reams of data to figure out exactly which managers performed well through the downturn and which firms were simply products of a bull market that they rode to solid returns.

Market observers expect fundraising to beat last year’s totals. In the US, managers including buyout, secondaries, venture and mezzanine raised a total of $80 billion last year, compared to $87.5 billion in 2009. Those totals are way down from the $236 billion raised in 2008, according to placement agent Probitas Partners.

European firms raised €15.9 billion last year, €16.1 billion in 2009 and €70.5 billion in 2008. And in Asia, firms raised $29 billion last year, $14.9 billion in 2009 and $50.2 billion in 2008, according to Probitas.

“A lot of institutions have existing [managers] coming back with a new fund, and institutional investors must make a decision to what degree they are going to support or decline to support all their existing managers,” says Andrea Auerbach, managing director at Cambridge Associates. “[LPs] have to be thoughtful about [their decisions]. Some relationships may be with managers that are several funds long, and those can be fairly difficult. It’s an intense decision not to re-up, especially if that manager has delivered returns for that investor.”

Sources say 2011 could prove to be a year of great leveling in the private equity market – a time when managers who are unable to live up to their expectations, those who simply rode the bull market and then fell hard when the momentum stopped – were revealed as sub-par performers and lost the support of their backers.

“There’s no doubt that not all of the 1,500 to 1,600 funds in the market will get raised this year,” says Jason Glover, partner at Simpson Thacher & Bartlett, who works with private equity firms on fund formation. “And many of those that are raised will fail to hit their fund target size. That in turn will lead to a distortion of their investment criteria.” For example, he says, funds that fail to reach their targets may have to reduce the target amount of equity that they look to put into deals. To pre-empt this, says Glover, the good managers are setting conservative targets.

One thing is certain: for many firms, fundraising this year will be a bumpy ride.