Tide of capital has gone out

There is widespread belief that LPs are only likely to back existing fund managers, and even then only after prolonged due diligence and likely at a lower level than previously. What are your views on this?

"That's probably a bit too black and white, but I think it's fair to say it's considerably harder for first time groups to raise money for a number of reasons.

Given all the uncontrollable risks we see around us today, backing a first time fund is a controllable risk LPs may be increasingly unwilling to take - effectively, why back someone you don't really know when you can back someone that's got a demonstrable record of success?

The quantum of capital in the market has obviously shrunk, making it harder for groups at the margin.

Will due diligence take longer? Probably - but then again it can - there's no rush to commit so why not take your time and de-risk the decision as much as you can?

Will the total amounts going in be lower? Again, that feels like a sensible point of view, albeit it will vary by each individual circumstance.

"One way to think about this question is to paraphrase Warren Buffet's analogy about the tide going out. The 'tide' of capital available for new commitments has definitely gone out (or would appear to have). Asset allocation issues (ie falls in public markets) and lack of distributions are putting programmes under stress (in terms of their ability or desire to make new commitments). Whatever assumptions made in 06/07 about investment pace and distributions are likely to be very, very different from the reality today. So as the 'tide' subsides, certain groups are going to find it harder to successfully compete for a diminished pool of capital and first time funds are in this group.

"Moreover, on this first time fund issue, there's an overlay of geography. One way we think of this is in terms of a 'risk budget' that we have for each investment. The more 'upproven' the manager, or the less developed the market, the higher the risk, and we factor in both when we think through how we want to spend the risk budget on a particular investment. What that means is that we'd look at first time funds in more developed markets slightly differently to those in less developed ones. Finally, all first time funds are not created equal, even taking into account markets. We view spinouts from captives (where an established team can have a long record) as a different proposition to an 'alignment of the stars' offering where three or four principals all join together for the first time."

As a result of the downturn in the markets, LPs have been changing their investment strategies. What are your views on this? Has Dunedin changed its strategy, and if so, to what sectors and why?

"Yes - I think that's not an unreasonable statement. I think there's been a bit of a change of focus towards smaller managers (as far as I can tell) and away from the multi billion euro funds, as well as into the turnaround and distressed credit space. As for Dunedin - no change at all. 100% focus on mid-market buyout - as this is the business we understand. What has changed is that we are reviewing a far higher number of manager specific secondary opportunities than a year ago."

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