Navigating a fundraise

Despite expectations of 2011 being the "year of fundraising", fundraising news has actually been preciously rare this year. "The numbers you see are not the full picture," says Sonya Pauls, partner at SJ Berwin. "We are as busy as we were in 2003 and 2007; it is just that not all work has turned into a launch yet."

In fact unquote" has recorded just 50 fund closes this year in Europe, including interims.

This figure suggests that, as Pauls indicates, more are waiting to launch, and/or taking longer to close. Those not yet on the road will be assessing the attributes of those who have already set out successfully.

Unfortunately, it will be difficult to create a roadmap from recent events. A few weeks ago saw EQT raise €4.75bn in nine months. The Nordic buyout titan's solid reputation goes a way to explaining the swift success. But hot on its heels, unquote" reported that a CEE relative newcomer, Abris Capital Partners, raised €210m in a first close three months after PPMs went out. What makes it more impressive is that the team has no exits under its belt. One could be forgiven for wondering what gives.

It turns out, track records are all very well, but it is increasingly about cash-on-cash. And a lot of erstwhile "top" firms are struggling to settle into cruise control. It has meant that, rather than a flurry of fund launches this year, many hungry GPs are postponing and working on exits. Where there are none, such as in the case of Abris, LPs are looking at the robustness of underlying portfolio companies – instead of not looking at all.

"Track records are no longer the most important thing," said one LP. "This is because they were created in a very different time. What is most important now is what their existing skills are like – and looking at current investments and their financials is the best way to do that right now."

Pauls backs up the difficulty: "It is a story of opposites, with some first-time funds getting to final closes, while large brands take more time. Some of our clients close in six weeks; others take 12-16 months." Indeed Augur just closed its second financial services fund in Germany on €212m – short of its €250m target after a full year on the road. Gilde in the Netherlands had to extend its raise to reach €50m after two years on the road – a way off its €75m cap.

Rethink your LPs
In the previous generation of fund raises, investors nearly universally wanted to double their commitments. Now they are halving them. Obviously they're re-thinking their fund manager relationships, so why not give them a taste of their own medicine. EQT's €4.75bn sixth vehicle comprises 50% non-European LPs, up from just a third in its fifth fund, with an increase in Asian Pacific investors most marked: 23% in this vehicle up from just 7% in the previous. 18 of Inflexion's 30 LPs are new. Half of GCP's 10-strong institutional LP base is new – indicating some fall-out from Fund II. Fund II, on the other hand, had all Fund I investors re-up. 56% of Montagu's latest fund was raised from existing LPs.

Rethink your terms
Offering incentives to get LPs on board are increasingly commonplace, with BC's latest fund a well-known example. But this should be used as a tool to expedite supportive investors, not as a carrot for others.

There are also technicalities to consider. Pauls says a number of GPs – successful ones – are scaling down their no-fault rights; GP buyout-rights are being strengthened; and draw down is becoming more aggressive. From the LPs' side, they are increasingly seeking more of a GP contribution to better align interests.

Get the target right
Montagu IV, at €2.5bn, was only marginally larger than Montagu III, at €2.26bn. This strategy is probably right for large players; BC Partners hit a second close this summer on €5.5bn for its latest fund – equal to the size of its predecessor raised in 2005. The latest vehicle is targeting €6bn, a modest increase.

Ultimately, targets should be determined by dealflow, strategy and resources, says Mounir Guen, CEO of MVision. And it varies depending on the scope of the fund (size, geography, etc). "A global fund may have seen its value halved recently owing to foreign exchange fluctuations. Granted the assets owned are worth more, but buying the same assets now requires more money. Just to stay where you are, you many need to raise 50% more."

It seems the smaller the fund, the more sizeable the increase should be. For example, Inflexion more than doubled its previous fund size when it raised £375m for its latest vehicle, while Growth Capital Partners raised £160m earlier this year, up from £100m for its predecessor, which closed at the end of 2005.

Ensure IR is ongoing and beefed up during the fundraise
IR has always been a crucial element to any fundraise. As investors, LPs deserve top-notch communications. But now more than ever, investors want to see that deal-doers are originating and managing rather than dealing with RFPs.

Montagu has three full-time staff dedicated to investor relations but this number doubled during its fundraise, with a fund accountant brought in to track record data; a portfolio manager providing due diligence documents for portfolio companies and a secondee accountant dedicated to diligence requests.

Answer all questions – but don't be too boring
PPMs are not merely sales pitches, but guidebooks. They should not provide a glossy picture of your offering – gone are the days of dumb money. This holds true for intra-fundraising reporting too. Says Martin Prohazka of Gain Capital Partners: "I want better reporting. I receive excellent reports on portfolio companies, but not on the fund. Other GPs do the opposite; with strong fund reporting but less on the underlying businesses. I want all the information clearly presented."

They should also be genuine. Says Sven Berthold of Wega Support: "It is surprising how similar all PPMs are, and yet how different the wording often is to what we know the case may actually be."

Be patient
Most advisers agree "there will be funds that are raised very quickly and are oversubscribed, and there will be those that bob along... for what seems like eternity." The advice from Montagu's Vince O'Brien? "Hang in there. This market really tests your patience."

That also means perhaps settling for something below your target, or for an odd number. Augur in Germany recently missed its target, while DBAG closed on an unusual €242m. It is best to close near your target rather than holding out and hoping for a few stragglers. It could be that your perseverance costs you the patience of your soft circles.

This story is an excerpt from the cover story of the November 2011 issue of unquote" Private Equity Europe.

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