New sweetspot for LPs

The death of the mega-fund was called by many a clever placement agent at the end of 2007. One even told your correspondent of a disagreement he had with the head of a large buyout house last summer: the GP had effectively secured sufficient funds to close on target, so the agent, foreseeing the doom that lay ahead, suggested closing the fund then and there, before the window for raising mega-funds was firmly shut. But a fee hungry chief, eager to ‘grab the money while you can’ insisted on carrying on. A few months later the agent was vindicated – a handful of LPs with soft commitments suddenly got cold feet, meaning a lengthy and tiresome process of reassuring had to be done to bring allocation levels up to pre-credit crunch levels. To date the GP has been conspicuously quiet about a final close, in marked contrast to the fanfare surrounding such announcements a year ago, when dizzying sums were raised in record time.

Now the sun may be about to shine on a new pasture, with most LPs intending to increase their allocations to lower and mid-market funds. A recent survey conducted by placement agent Almeida Capital reveals that small buyout opportunities (defined as funds below $500m in size) rank tops among 130 global LPs. Amongst European investors, 85% find this space attractive, with less than half finding the large buyout funds attractive in 2008. Medium buyout also fares well, with 82% deeming the bracket an appealing one.

“LPs have spent two years investing heavily in mega-funds, so looking elsewhere is a natural next step,” says Almeida CEO Richard Sachar.

Investors are also looking to build relationships with new fund managers, with just under half (44%) aiming to allocate to new vehicles in 2008. “This is probably a doubling of what the figure would have been a year ago,” says Richard Sachar, chief executive of Almeida. “LPs were extremely busy re-upping over the last 12 months so now many are looking to rebalance their portfolios. It is not surprising, but it does mark a big change in the market.”

What is surprising is that despite a perceived cooling of appetite for private equity, more than 90% of surveyed LPs intend to maintain (50%) or even increase (42%) their allocation this year. “Investment and allocation committees tend to base decisions on historical performance, which has been good, so this continued interest is not surprising. However if we see a bad year in 2008, I would be surprised to see continued momentum this time next year,” Sachar says. Insurance companies were the most eager, with nearly three quarters of those polled anticipating pumping more money into the asset class. Less than a tenth plan to scale back on private equity investing.

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• Topics
• LPs
• UK / Ireland