Fundraising: GPs face uphill climb

As 2009 drew to a close, the signs of slow recovery led many to predict that the market would see a significant acceleration in fundraising activity into 2010.  First in line, surely, would be those GPs whose cycles had fallen awkwardly, leaving them low on dry powder as the market shut down. But despite the odd notable fundraising effort, the market is still quiet.

This will have to change, though. While GPs with unspent dry powder might seek to alleviate the problem by seeking an extension to their fundraising period - a problematic process in itself - others will be forced to go to market in order to survive.

What sort of reaction will these GPs encounter? Certainly in 2009 the investment programmes of most LPs were either on hold or severely compromised. However, in the first half of 2010 there was growing evidence that pockets of LP appetite were again begin to shown themselves. On one hand, family offices are well known to have a more aggressive risk profile than most.

On the other hand, it stands to reason that pension funds ought to have an increased appetite for alternative assets: returns from their equities portfolios have eroded to the extent that they are barely outperforming gilts and government bonds. In the global reality of pension deficits, these investors are forced to seek higher returning assets to plug the gaps. Then there are the new pockets of capital, often emerging in the less developed, but rapidly growing markets in the Asia Pacific region.

Nevertheless, there remain a whole host of issues that will make fundraising for European GPs difficult for the foreseeable future. To begin with, the flow of distributions going back to the LPs has simply been insufficient in recent months and, while exit activity is slowly picking up, the issue of distributions remains a core concern in the LP community.

To compound this, the modest rise in economic confidence witnessed in early 2010 vanished in the face of mounting worries over the crisis in Greece and other Southern European economies. As one senior LP said: "There are real concerns among LPs everywhere about the macro economic issues and currency risk in Europe. It has affected the groups out fundraising over the last quarter and it is likely to continue for the next two quarters at least".

All of this means that while there may well be money out there, it will be a tough task to find it. GPs will have to travel far and wide and play a patient waiting game. What is more, once they find the capital they will face much more rigorous questions over their key people, their motivation, succession issues and how they have performed in the face of difficult market conditions. It is certainly a case of caveat venditor.

More extensive analysis of fundraising issues, both from the LP and GP perspective, will appear in the upcoming edition of unquote" Private Equity Europe.

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