
Q&A: The state of fundraising

Greg Gille talks to Antoine Dréan, founder, chairman & CEO of independent private equity placement agent Triago, about the current market.
2011 was billed to be an important year for fundraising. Halfway through the year, how would you describe the fundraising environment?
It's a very tough, two-speed market. A significant number of GPs currently fundraising are unlikely to hit their targets. It's also clear that many GPs have been holding off fundraising campaigns, waiting for better times that may not come. LPs, burdened by excessive investments made in poorly performing credit bubble vintages, are giving less money to fewer managers, and subjecting the latter to greater scrutiny than in the past. The GPs that are successful in this market are not just brandishing exceptional track records; they are demonstrating hard-to-replicate expertise that is not reliant on financial engineering or leverage. Regarding the total amount raised this year, we expect at best only marginal improvement over the $200bn achieved last year.
Some funds have been able to raise very quickly in the past few months. What characteristics are especially appealing to LPs at the moment?
LPs are attracted today to operational capabilities as well as to niche strategies like turnaround and emerging markets investing. They want teams that have a sourcing edge, that avoid auctions, and that demonstrate value-enhancing creativity, such as add-on investments that have escaped the attention of others. In terms of regions, China and Brazil are among the hottest, but other emerging markets like Indonesia and Columbia hold increasing appeal for LPs, precisely because they are less crowded. Whatever the geography, mid-market funds are very popular, but savvy investors know that there are good opportunities across the fund size spectrum.
Exit activity has been strong this year. Do LPs still worry about calls outweighing distributions, and will this influence fundraising efforts going forward?
Until distributions significantly outpace calls, fundraising will remain difficult. In many cases, the revival of exit markets in the fourth quarter of 2010 and the first half of this year meant that private equity funds returned net cash to LPs for the first time in three years. But if the call/distribution ratio resulted in net cash for some LPs, it was probably because their investments were less concentrated than the average LP's in the troubled credit bubble vintages of 2005 to 2008. These vintages are where the bulk of the buyout industry's near-record dry powder of some $400 billion is held. With investment period deadlines fast approaching for that dry powder, we see calls still exceeding a rising level of distributions from exits this year. This is a belief shared by many LPs and will undoubtedly continue to have a negative influence on fundraising.
Do you think the current turmoil in public markets will have an impact on GPs currently raising, or about to hit the road?
Some people have raised the concern that the denominator effect will kick in as it did at the height of the financial crisis two years ago and restrain fundraising even further. That certainly has not happened yet. The main impact of the current market turmoil is on what LPs demand from the private equity funds they are considering investing in. Public market volatility means GPs today must demonstrate even more effectively than before that they exploit under-invested, hard to access markets and that their strategies show little correlation with stock, bond or other indices.
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