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© 2009 Preqin Ltd. / www.preqin.com
October 2009Feature Article
Feature ArticlePrivate Equity Fundraising in Di cult Times
If anyone needed con
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rmation of just howdif
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cult it is to raise a new private equityfund in today’s environment, then our Q3Fundraising Update on page 13 providesit. Whatever statistic you look at, thepicture seems to be one of unrelentinggloom: lowest
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nal closes for nearly sixyears (82 funds, $39 billion raised); a 3%decline in funds on the road as managersabandon their plans; and the averagetime taken to raise a new fund extendingbeyond 18 months for the
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rst time.Well, nobody said 2009 was going to beeasy. However, dig beneath the surface,and there are reasons for con
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dence.First and foremost, the LPs investing inprivate equity retain their appetite for the asset class. Preqin is in continuouscontact with thousands of LPs fromaround the world, and in our mostrecent survey of investment intentions(conducted together with the BVCAduring July and August) the following key
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ndings emerged:• Target Allocations: most LPs (over 80%) intend to maintain their targetallocations over both the short andlong term. Over the very short term(12 months), there was a slightbias towards reducing targets (11%vs. 7% increasing), while over themedium term (24 months), therewas a more noticeable tendencyto increase targets (15% vs. 5%decreasing).• Factors In
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uencing Targets: most of the LPs surveyed are satis
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ed withthe returns on their private equityportfolios. Among those planning toreduce their targets in the short term,the reasons are overwhelminglyliquidity-related – in particular thedreaded ‘D’ word. Conversely, thereasons cited for increases in privateequity targets are overwhelminglyreturns-related.• Optimism about Future Returns: LPsare generally optimistic on returnprospects for private equity, with87% of LPs agreeing that the 2008 – 2010 vintages will deliver goodreturns.• 62% of LPs Currently Looking for New Investments: liquidity problemshave forced many LPs to shelve their current investment plans, but the factremains that 62% of the LPs polledare still looking for new investmentopportunities. They may be morecautious and selective than ever before (we’ll come onto this later),but they are still looking.Further encouragement comes frominterim closes. Q3 2009 may have beena dreadful quarter for
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nal closes, but,as Fig. 1 shows, the number of fundsthat have achieved interim closes isat least showing signs of life. 81 newfunds achieved an interim close duringQ3, con
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rming that managers with acompelling proposition are
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nding LPsto make commitments to their funds.The fact that there is some momentumin interim closes may well be a re
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ectionof how long it is taking managers toachieve their targets: better at least tohave an interim close and get on with thebusiness of investing, rather than wait toreach the initial target.The elephant in the room is, of course,dry powder: with over $1 trillion alreadycommitted to existing funds, as shownin Fig. 2, LPs’ability to commitlarge sums tonew funds islimited.Combine thisdry powder with the factthat there arestill 1,571 newfunds on theroad competingfor LPs’commitments,and you havethe ‘NewNormal’ facingGPs trying toraise a new fund:• Appetite: the LP appetite is de
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nitelythere for the right strategies andteams. However, the amount of money they have available to commitmay be less than previously.• LP Churn: some of the LPs youknow, and who may have supportedyour previous funds, will be out of themarket for the time being. However,other new LPs are coming in to theasset class and/or re-assessing thestrategies they want to invest in.You need to
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nd the right LPs andconnect with them;• Competition: you may have a greatstrategy, team and proposition, butit will not be unique – 1,570 other funds are competing for the LP’sattention. Why should the LP investwith you? You need somethingspecial;• Focus on the Downside: LPs knowthat there will be great investmentopportunities out there in 2009 and2010, you don’t need to convincethem of that. What they do needconvincing of is that you have theteam and the processes in place toprotect against the downside in adif
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cult environment;
Fig. 1:
6782810102030405060708090Q1 2009Q2 2009Q3 2009
Private Equity Interim Closes by Quarter
Source:
Preqin
N u m b e r o f I n t e r i m C l o s e s
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