Size isn't everything

Such brazen chat is surprising given current market conditions, and what many had safely assumed was a widespread acceptance that mega-funds were a thing of the past. Not so apparently: "Smaller funds are not great, since the fees are too small to attract top talent and to be able to maintain many offices."

This sentiment echoes that of many bankers still clinging onto hope for their bonuses. In the private equity world, such motivations would explain the desire to continue raising such vast sums of capital. But will it be possible?

"Only 30-40% of the current buyout market will survive, so with fewer funds in the market vying for LP commitments, each survivor will be able to raise more capital." So a larger chunk of a smaller pie, equating to a fund roughly equal to the size of the previous one raised.

Advisers concur that many LPs are currently hoarding their cash, rather than being truly in dire straits. Gatekeepers and placement agents also suggest that while the denominator effect is a true concern for some, its impact has been exaggerated by many in order to postpone drawdowns. Finally, there are some US pension funds choosing to divert their funds into other areas (namely debt vehicles to fill the funding gap in buyouts led by the GPs they back; see next issue for more on this).

So yes, LPs may still have (lots of) cash. And yes, the pool of possible investment opportunity might be smaller. But there is still something of a leap from these arguments and any assertion that maintaining size for a future mega fund raise is a certainty. Indeed, in the face of growing sentiment and evidence to the contrary, the assumption seems pie-in-the-sky.

Yours sincerely,

Kimberly Romaine

Editor-in-chief, unquote"

Tel: +44 20 7004 7526

kimberly.romaine@incisivemedia.com.

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