Innovative GPs setting off fundraising fireworks

A seismic shift in strategies has been apparent in the latest generation of fundraising efforts. In today's "new normal", the old ways are rightfully being questioned and even threatened by innovative and reactive strategies.

An overgrown trail was blazed afresh by Duke Street Capital Partners after the firm shelved its year-long effort to raise an €850m traditional LP fund last year in favour of a deal-by-deal model. Cynics cited it as the death of a firm; optimists suggested it was merely the failure of a fund. The latter seem vindicated, with a recent deal struck with Tikehau Group offering Duke Street a lifeline. The Parisian investment firm bought a 35% stake in Duke Street in return for fresh capital to launch a fund. Then, in August, Goldman Sachs emerged as a possible backer in Duke Street's new fund.

According to Peter Taylor, managing partner of Duke Street Capital Partners: "Among our existing investors, and for intermediaries on new deals, there has been a hugely positive reaction to Tikehau's commitment." The firm is now looking to invest €500m over the next three to five years. "We expect around 20-30% of that to come from a fund, while the remainder will come from co-investors."

Firms that have survived the fundraising trail represent the evolved breed of private equity

The potential Goldman Sachs investment started out as a secondary process. "A lot of investors in our 2006 fund are no longer active in the private equity market so we felt it would be helpful to give them a choice to sell if they wanted to," says Taylor.

Momentum is what Duke Street may have lacked in 2011, but gained with the Tikehau deal – and it is key in fundraising, particularly if the GP is changing strategy. "It is crucial that you have a cornerstone investor, it is very difficult to gain traction without one," says Victoria Younghusband, funds partner at law firm Speechly Bircham.

Gathering momentum
Indeed, Warren Hibbert, founding and managing partner of advisory firm Asante Capital, believes timing is key: "It's about accelerating momentum; without that, funds can fall into a period of no movement where they become stale or, worse, fail altogether."

This may be why unquote" is recording a high number of successful closes for relative newcomers, even as some big brands take much longer and miss their targets. Synova Capital is a case in point. The firm hit its £110m hard-cap in three months, raising more than double its predecessor – which had also been its maiden fundraising effort. "The most important thing about fundraising is momentum and creating demand," says Philip Shapiro, managing partner of Synova. "If investors are able to sit on the sidelines with no pressure or urgency to invest, they will adopt a wait-and-see approach. They will watch how you perform on deals and this can result in funds being left on the roadside."

NIBC spinout Avedon Capital Partners – one of many teams borne out of post-crisis regulation forcing captives out of banks – reached a final close on its first independent fund in August this year on €190m, after two years on the road. The 11 months between Avedon's first and final close was key in that it enabled the GP to get some deals and exits under its belt. "It was important for us to do some exits and make some new investments so that potential investors could assess our ongoing performance," explains Alfred Tulp, managing partner at Avedon. "Perseverance is important and successful exits helped, which was lucky during the fundraising period. There wasn't a rush and potential investors wanted to see how we were doing."

Another first-time fund hoping for a swift raise is Portobello Capital. The Spanish GP was spawned in 2010 when Inversiones Ibersuizas partners Ramón Cerdeiras, Fernando Chinchurreta, Juan Luis Ramirez Belaustegui and Iñigo Sánchez-Asiaín were dismissed, triggering the key-man clause on the GP's two existing funds. LPs then voted to transfer the vehicles back into the hands of the team that had managed them, giving rise to Portobello.

Portobello is now preparing to hit the road and Belaustegui is well aware of the need to reach that all-important first close: "We would like to hold a first close before year-end, if possible. The amount isn't important, what's important is to demonstrate to potential investors that the fund can be raised successfully. In 2006, we held a first closing with almost 90% of the target, and two months later we held a final close."

With the majority of today's LPs focused on outsized returns rather than portfolio diversification (according to a recent study by fund administrator SEI), new teams could benefit from niche strategies.

An example of this is NorthEdge Capital, set up by former LDC regional heads Grant Berry and Andy Ball, which closed its debut fund on £225m in April this year. Not only was it an impressive £25m over target, but 42% of LPs hailed from the US – a real feat given it invests exclusively in the North of England. James Moore, global co-head of UBS's private funds group, acted as placement agent for the maiden vehicle. Explaining why he agreed to work with the new team, Moore says: "In NorthEdge, you have two individuals that were the founders of LDC's Manchester and Leeds offices, both with a compelling track record."

But it was a tough one to attribute, meaning they had to be creative. "They had to piece it together from public records, which presented an additional fundraising challenge. This is not uncommon, but does make the undertaking more difficult for new teams," says Moore.

The team also needed to show it could originate. "This was tricky," admits Grant Berry, managing partner of NorthEdge. "We had to build a pipeline without the capital to do the deals. However, this worked to prove the strength of our relationships. We were able to get management teams to delay processes and wait for us to hit our first close before being able to transact."

This also gives visibility on an otherwise blind-pool fund, which worked a treat for Equistone. The Barclays spinout, whose first independent fund closed on €1.5bn in January, had deployed 30% of its commitments at final close.

Let's work together
Backing new teams requires an extra layer of diligence from LPs – namely that of team cohesion and compatibility. Anne Fossemalle, director of equity funds at the European Bank of Reconstruction and Development (EBRD), says: "When assessing a new team, it is hard to judge how people are going to be able to get on with each other over the life of the fund. We spend a number of hours talking to the team and trying to understand if their interests are truly aligned and if they really have the same ideas and strategy.

"It's amazing how much you see during the first pitch – the natural dynamic between people and how they interact with each other; if they let each other speak or talk over one another, if they give the same answers and the differences in body language can provide plenty of insight."

For NorthEdge, with only two team members in place, reassuring potential investors of the future team's ability to work together was certainly challenging. "We had a very good idea of who the team was going to be before we had the capital," explains NorthEdge's Berry.

The tough fundraising market has given rise to more investor-friendly terms, such as early-bird discounts and special agreements over co-investment rights or early liquidity options.

"We expect better terms from first-time funds because we want these vehicles to be set up in a way that when the firm moves onto its next fund, it operates in a way that welcomes institutional funding," says Fossemalle.

But according to Asante Capital's Hibbert, new managers offering discounts gives the impression of being defensive. He believes new funds should stick to vanilla, market-standard terms. Berry agrees with this idea: "We made a decision early on not to make it difficult to invest when it came to terms, so we went out with market-standard structures."

"A new fund shouldn't try to do anything unusual," says Speechly Bircham's Younghusband. "They don't want to be explaining why they're not going down the traditional route."

One area where LPs are stepping up demands on fundraising teams is reporting and transparency. The SEI survey found that 61.3% of LPs do not, or are not sure, they receive all the information from their GPs – though 83.1% of GPs believe they provide the necessary detail.

"Our investor relations approach is a team-wide effort. It is fronted by myself, but our quarterly internal investor relations updates are carried out with the entire team present," says Berry. "Everyone knows our investors and understands the importance of maintaining the relationship."

Avedon's Tulp agrees: "For us, it is very important to build a strong relationship with our new investors. We take a good deal of time to tell them exactly what we're doing and how we're creating value. It's important to share both the good and the bad, to be transparent."

"Fundraising is an emotional rollercoaster, particularly for a first-time manager," says Moore. "You experience moments of despair when an investor you've worked night and day to secure declines the fund, and elation when someone comes through for you. It's an exhausting process, which requires stamina and an unflappable mindset."

Only the brave
But however challenging and taxing the process is, what is clear from the teams that have braved the market in today's new normal is better, stronger and deeper alignment with investors. What's more is the feeling of overwhelming gratitude to those investors that have taken the risk and the GP's desire to prove them right.

It may be emotional, brutal, challenging and hugely time consuming, but the overall result is a private equity market working in the most efficient and effective manner, and, more crucially, proving the importance, relevance and worth of the asset class.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to  

• Topics
• Fundraising
• Duke Street
• Goldman Sachs
• Asante Capital
• Synova Capital
• NorthEdge Capital
• Top story