Last year more than $450 billion was raised by private equity firms, according to PEI data, and while the capital raised in the first half of 2018 has declined, there are still high levels of institutional demand for private equity product.
Yet if you are not one of a select few, it has “never been more difficult to raise private equity funds than it is today”, says Warren Hibbert, founder and managing partner of placement firm Asante Capital Group and fundraising rainmaker.
In this three-minute video, Hibbert describes the market forces conspiring to strangle some fundraises and push others over the line.
The full transcript
How does today’s fundraising market compare with 2007?
Almost anyone – to be slightly flippant about it – almost anyone with half a track record, if any, who had come out of banking, who had a good idea, could raise some money. They may not hit their target, but you could go out and raise something.
Today’s market is far more bifurcated. The investors are acutely selective as to who they pick as a long-term partner and that’s largely driven by the realisation or the assessment that they do not wish to have an infinite number of relationships. And roughly investors came out the crisis with 150 to 200 relationships, depending on your size and who you were, and realised that actually that was just over-diversified. And so the magic number became somewhere between 20 and 75 relationships. So this rationalisation of LP portfolios meant that they were throwing out or discarding relationships that they had held for many, many years, but who were superfluous to their portfolio. And that meant it was 10 times harder for the new relationship then to find the space in their portfolio. So it’s very difficult to get into an LP’s portfolio; infinitely more difficult than it was in ‘07 for investors. And then you just do the maths on that: roughly, you’d know better, but, call it 2,700 to 3,000 funds in the market today roughly. LPs are receiving between 300 and 800 PPMs a year depending on who you are, their size etc, and, whether you’re an advisor or the principal investor yourself, you’re going to be making somewhere around eight to 12 commitments a year. Eight to 10 of those are going to be re-ups. So the eye of the needle for that new commitment, to a new relationship, is very, very small.
And so I would say, in summary, that it has never been more difficult to raise private equity funds than it is today.
Who is getting funded?
All the money is going in at the top. So the mega-funds, call it $5 billion and up, who have been consistent, generated strong returns, have built massive resource bases in terms of manpower, are winning. And in addition to that there is demand for realigned capital; we’ve seen good spin-out activity in the States and Europe, to an extent in fact in Asia as well. We’ve seen some in Australasia and China and South-East Asia, which LPs and particularly the endowments are very keen on, because the relationships that the endowments held 15 years ago have now outgrown them. Endowments aren’t able to follow that capital in terms of scale, and so they look for the next new thing. But also there’s alignment of interest, which is important for them: GP commit relative to fund size.