Fundraising travails to test relationships

01 February 2009

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Although the preliminary fundraising figures for 2008 are not yet finalised, sector specialists know that they will be down on 2007's record year. What is not yet clear is how fundraisers will fare this year - if they go to market at all. All this puts even more strain on already tricky LP-GP relationships.

Despite this, there have been some glimmers of hope. In Italy, PM & Partners succeeded in closing their second fund on EUR340m, EUR40m oversubscribed, while Alcedo also closed their third fund over their EUR150m target on EUR178m.

Finding investors is no longer the sole challenge when raising a fund. Managing existing relationships with LPs and striking the right balance between flexibility and firmness is now a growing concern. Not only are LPs far more selective in their fund selection, but now GPs will increase their own due diligence on LPs. Just look at Permira: their stand on SVG's situation risks negatively influencing their future fundraising efforts, according to some industry sources.

Everything points to a shift of power in favour of LPs. Few, if any, will be rushed into making allocations and some may even demand tougher terms - although whether they get them remains to be seen.

A survey recently carried out by placement agent Almeida Capital found that LPs' overall allocations to private equity have fallen, but that they are still claiming they will invest large sums into private equity. According to the survey, more than two thirds of LPs said they planned to commit over $100m in 2009 (see graph), with the number of LPs planning to commit between $100-250m increased from 2008's allocation by 6 percentage points. This is in contrast to the top bracket, which has dropped to 19%, but half of these investors plan to commit over $1bn each over the course of 2009.

Despite these figures, anecdotal evidence suggests LPs are still sorting out how much they actually have for allocations; with some being hit by a reality check. The Permira/SVG situation will prove one of several.

While the LP-GP dynamic is redefined by current conditions and in particular decreasing liquidity, uncertainty remains part of the forecast.