Riding the storm

France enjoyed a buoyant fundraising climate for most of 2007, with many funds being launched and a number reaching final closes in Q1 2008. The current financial turmoil that plagued the latter half of 2007 makes it surprising that not only are they closing, but all are hitting their fundraising targets and some even exceeding. This would point to a healthy fundraising climate for this year that should receive an additional boost when the MiFID guidelines are adopted into French law, which have allowed close-ended investment vehicles the possibility to market themselves openly to limited partners (LPs).

The apparent buoyancy of the market despite wider economic turmoil could, however, raise a number of concerns. With the deal volume comparatively low (the large LBO market seemingly limited to a deal a month currently), do GPs have too much capital to invest? Some GPs, even with the tightening of financial markets post credit crunch, have raised their largest fund to date, while others have held closings over their initial targets, such as Pragma II, which closed at EUR345m, against an original target of EUR300m. Is there going to be large capital overhang for the coming months and years? This suggestion also brings forth the unfathomable question of whether or not GPs should scale back their fundraising.

It may be too early to establish if there will by any future repercussions of this current trend. Or indeed whether it is a trend at all, or simply an anomaly. However a pessimist could draw similarities to Q1 of 2001, when venture capital firms were raising huge funds both in France and abroad. The economic market at the time was certainly not inspiring, yet a large amount of funds were still being raised. GPs subsequently found it increasingly hard to invest the vast amount of capital in their funds, which left LPs pushing for the cutting down of funds' sizes - a nudge some firms eventually submitted to. LPs will always be unwilling to pay large management fees, especially in larger funds for uninvested capital. Could GPs possibly make the same mistake twice?

The current financial climate has also seen various levels of adaptation from GPs with regards to funds and fundraising. As covered in the last issue of France unquote" Olivier Bossan of Argos Soditic explained that the creation of Argos Expansion, a new sponsorless fund, was due to investor demand. This month also sees XAnge closing their first ever capital development fund. This highlights the flexibility of private equity in an effort to adapt to the market conditions and the demands of LPs.

There is bound to be a greater degree of caution from LPs in the coming year with GPs repeatedly having to prove themselves with strong returns, impressive track records and perhaps most importantly nowadays, the ability to generate a good deal pipeline. Established GP teams are unlikely to see historical investors 'jump ship' to another fund. However, new teams may find fundraising difficult as they struggle to generate the confidence that the LPs require. First-time funds always face problems, but these are magnified in tough economic conditions.

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