UK GPs: It’s spin-out time

With poor fund performance putting pressure on carry, many GPs believe the incentive to spin out has ‘never been greater’.

Many private equity GPs in the UK feel that now is a better time than ever to leave their firm and set up a new fund, according to a survey by accounting firm Grant Thornton. More than two-fifths of the GPs surveyed, or 42 percent, agreed that the incentives to spin out had “never been greater”.

One of the biggest drivers behind the sentiment is that in many cases the value of principals’ carried interest has been eroded as fund performance has suffered, according to market participants PEO contacted.

“Some funds have been really caught out in terms of deploying a lot of capital at the height of the market. You have to wonder how they will work through and ensure that they can reward themselves and their younger members of staff,” said Anne Gales, who recently co-founded London-based placement agent Threadmark.

It is at times like this that hungry, junior professionals ask whether the carry will be enough to keep them where they are.

Loren Boston

“There is a lot of pressure on returns,” said Loren Boston, head of private equity fundraising at Eaton Partners. “And it is at times like this that hungry, junior professionals ask whether the carry will be enough to keep them where they are.”

Adam Turner, head of executive search firm Odgers Berndston’s private equity practice in London, is currently working on two mandates involving teams spinning out and setting up first time funds. “A number of guys within the general partnerships are starting to look at each other and thinking ‘I am going to have to work twice as hard, for twice as long to earn half as much money’,” said Turner, who added that treacherous fundraising conditions – especially for first time funds – were still discouraging many principals from breaking away.

However, the damage suffered to many “brand name” private equity franchises – who will find it harder to raise capital – could ease the way somewhat for new entrants. According to Threadmark co-founder Bruce Chapman, some of the barriers to entry formerly faced by first time funds have been taken down. “[Before the crisis,] the market was looking fairly full and mature, with the larger brands accounting for the lion’s share of LP capital,” said Chapman.

The survey, which polled more than 100 GPs based in the UK, also found that nearly half (49 percent) of the GPs felt they were “under pressure to deploy funds”, although only 27 percent said they would be prepared to buy assets for higher multiples than their industry average.

Only 8 percent of the respondents said they did not expect their firm to raise another fund.