The advent of a new fundraising breed

More than €1bn per month: that is the average sum raised by Advent International for its latest fund. "The amount of capital in the market available for commitment is roughly half of what it was, so investors are much more picky," says James Brocklebank, managing director of Advent International.

Despite this, Advent closed its latest fund in just over eight months on €8.5bn, making it the largest raised since Lehman's collapse. The fund comprises more than 200 LPs, up around a quarter on the preceding vehicle Nearly all existing investors re-upped and the few that did not mostly abstained owing to withdrawing from the asset class. Roughly half the sum raised was from North American investors.

A blow-out fundraise is the exception in today's market. "The market is very binary. Some very large funds are hoping to close very quickly. But it's hard to know when they are firing the starting gun, since there is so much marketing that precedes a formal launch these days," says Jonathan Blake, partner and head of the international private funds practice at SJ Berwin.

At under nine months, Advent's fundraise took just half the time of BC Partners, whose remarkable €6.5bn vehicle made headlines when it closed earlier this year. What didn't make headlines was that BC had met with around 600 LPs before announcing a first close. And its success was achieved with minimal competition ­ a big difference to today's market.

Today's fundraising trail is an extremely crowded one. The unquote"
database has recorded 72 closings (interim or final) in the first 11 months of 2012, marginally fewer than the same period last year but accounting for more money ­ illustrating the prevalence of large funds on the trail right now.

In addition to BC, the first quarter of this year saw a number of sizeable first closes, with €14bn closed in a fortnight alone for European private equity. Apax Private Equity, IK Investment Partners and Cinven all contributed to that phenomenal fortnight ­ though all have yet to reach a final close.

Quick gestation
Luck doesn't account for much in today's market, so how did Advent manage to exceed its target in less than nine months, while others toil for more than a year? "We have a good track record of absolute returns, not just relative," Brocklebank stresses. "We have a very loyal group of investors that back our strategy and we are an increasingly rare animal in that we are focusing purely on one asset class." Indeed, Advent remains a private business, with no shareholders to pressure the GP to increase assets under management and pursue different investment opportunities.

What he didn't mention, but which LPs stress, is that the firm retains its talent ­ unlike some other names in the market right now. "Some of the old guard are moving on; that is fine, healthy even, but if it starts to look like a revolving door then naturally we worry," says Rob Wright, partner at Pantheon and an investor in Advent. There are seven keymen in the latest Advent fund, representing just two changes from the predecessor vehicle.

Timing is everything
Fundraising is taking longer; Apax, Cinven and Permira were all out raising for more than a year, despite various LP incentives. Permira has written to LPs to indicate it expects to close in the new year. "It was definitely more arduous," admits Humphrey Battcock, managing partner at Advent, estimating he had 70 meetings in the past six months. Brocklebank agrees: "The level of diligence is substantially more than previous funds," he says, indicating it has doubled. "There is more of a focus on the short term, with LPs digging in depth into our current portfolio."

"With all the extra data now available on performance, deals, markets, competition, people and so on, LPs' due diligence expectations are much higher, making it a far more complicated and protracted process," explains Wright. "Sometimes I almost feel sorry for GPs."

The need to meet with investors is not limited to the GP's IR team.
Battcock believes each LP saw up to 20 of the deal team during the fund raise. "We see all our LPs, all the time. We see our larger investors at least twice a year in one-on-one sessions and in at least two offices.

This is outside of our large meetings," says Battcock. Equistone, said by market sources to have closed around €1.4bn and to be "tying up a few loose ends" before a final close in the new year, has seen around 250 LPs for its current vehicle, with deal partners meeting around 200 of those investors.

There are some GPs whose unorthodox backgrounds defy conditions. Take, for instance, Abris Capital in CEE. The GP launched its first fund in the immediate wake of Lehman's collapse, to raise €320m in November 2008. Its blue-chip cornerstone re-upped for Abris's follow-on fund, meaning a first close on Fund II was held last October ­ despite the relative newcomer having no exits under its belt. "If it's good enough for Harvard, it is good enough for lots of LPs," one investor in the fund explained. "And being a newcomer has the benefit of no problem children in a portfolio, meaning the partners' focus will be on creating, rather than preserving, value. That is crucial in today's market."

As is the fact that the existing portfolio is in rude health. "We need to look more at current portfolio nowadays than at track record since we operate in a new marketplace." Indeed, Equistone has found LPs ask more about the past few years than ever before. "There is more focus on recent track record than long term.

By and large, LPs seem to forgive ‘a few bad calls' during a market that was ‘ridiculously hard to navigate'. Here, we are talking about the 2005-07 period. What GPs did in 2007 and 2008 ­ during the early-crunch days ­ is more crucial, as is GP behaviour during the 2009 trough and 2010 mini-recovery. Did GPs exercise caution as the crunch bit? Did they take advantage of the low entry multiples during the downbeat 2009-10 trough?" says Christiian Marriott, partner and head of IR at Equistone.

Marriott's firm put a full year between first close and final ­ with many interims in between to crystallise LP interest ­ and, as a result, has maintained LP momentum. "Recent investors are very positive since they are backing a fund that is already 30% invested. They can see where the money is going and have evidence of reasonable purchase price multiples," Marriott explains, citing multiples of 4.5-6.5x EBITDA for most of the new fund's investments.

Indeed, in the UK, lower mid-market investor August Equity may have a similar experience. Its third fund is targeting €180m, a modest increase on its €155m predecessor vehicle. The GP has identified investments of around 40% of the fund already so as to offer LPs visibility on investments.

Show me the money
The early-bird discount, pioneered by BC, has gained a following, though investor incentives are not new. "Co-investment rights have been used as an alternative to discounts and have been around a lot longer," SJ Berwin's Blake points out. "What is news is the management and streaming of these rights. LPs are making a concerted effort here to use these to give momentum to their fundraising."

Not everyone believes in offering a discount, with Advent having forgone that inducement and saying all its LPs have the same terms. Equistone also offered no such incentive. "We decided against a first-closer discount, since there is the risk that you get all interested parties on at first close ­ leaving you with less post-close momentum," Marriott explains, highlighting that first closes should act to boost momentum, not stall it. Equistone did, however, have an aggressive late penalty interest rate, which gave an economic imperative not to be left behind.

So despite the rhetoric, fee discounts may be irrelevant. "I don't think terms and conditions ever put anyone on or off, assuming they're reasonably standard," says Blake. "They're now still very similar overall to where they were 30 years ago, although there are significant developments at the level of detail. With the exception of large funds, where management fees decrease to reflect vehicle sizes, they've not changed and that is quite remarkable," says Blake. Transaction fees ­ a sticking point in the current cycle ­ are perhaps the real change in that they go into the fund's coffers rather than the GP's.

All the fancy financiers and fee incentives in the world won't help a lacklustre fund raise, since, ultimately, it remains about cash in and cash out. "LPs may be less demanding on terms and think more positively about GPs that generate cash for them," says Blake.

Indeed, in one of the UK's biggest success stories of 2012, ISIS Equity Partners was close to 3x oversubscribed with just two months between PPM and close for its latest vehicle, which raised £360m in April. The firm saw two thirds of existing investors re-up, with no sweeteners and with the same fee structure as the predecessor vehicle. The success came despite requesting an extension to the predecessor vehicle's investment period. The allure? Seven exits with an average gross return of 3.9x and 35% IRR in the 12 months to June 2012.

And perhaps the extension was no bad thing: it will have forced ISIS to engage with its LPs and sell its merits ahead of its soft launch. While many GPs fear asking LPs for favours, it is worth noting that both BC and Montagu Private Equity had done this prior to their impressive fund closes as well.

Give and take
Equistone's recent track record will have buttressed its latest success. The GP sold Global Blue earlier this year in one of Europe's largest exits by value, taking the total capital returned to investors to more than 60% of Fund III. In fact, during the 18 months of its fundraising, it returned €2.2bn to LPs from 15 exits (2.7x the cost of those deals). August's Fund I returned 2.9x to investors, while Fund II has 2.5x on one realisation, returning 37% of the fund. And even though their last fund was invested during the financial crisis, they have not had a single loss from their portfolio. LPs have noticed: It is understood that having launched in the summer, the fund already has commitments for around half the £180m target.

In 2011, Advent invested $2.8bn and realised $2.3bn ­ showing not only that it could hand money back, but also that it could invest across cycles. In 2010, the GP generated $1.7bn in exit proceeds. The GP, perhaps not surprisingly, had no pushback on its T&Cs. "The terms we went out with were accepted by everyone," says Battcock. They were nearly the same as the last fund, though they would not comment on the specifics. But even showering LPs with distributions can't guarantee a smooth raise.

Nordic Capital generated more exit capital than any other GP in Europe in 2011, with its Nycomed exit catapulting the divestment value to more than €12bn. Despite this, the GP recently reduced its target size. Rather than construe it as a sign of failure, sources suggest it is a prudent move on the part of deal doers which feel the drawn-out fundraising process is an unwanted distraction from deal-doing ­ at a time when opportunities for strong businesses at attractive valuations are rife (the GP put €1.7bn to work across the same period). But with just one partner dedicated to IR, the roadshow is taking its toll.

"The model is broken," one GP told unquote" at our DACH event in Munich recently, speaking about the LP/GP dynamic. His disillusionment was understandable: one of Germany's foremost brands has been trying to reach a final close for 16 months, despite hitting a first close in less than four and two strong exits announced shortly thereafter (generating 4.3x and 3x money).

Backseat drivers
LPs want more control of their fund managers now. The biggest change Equistone has noticed is that of governance requests. "It surprised me how much increased governance we have had to legislate for; no-fault divorce mechanics, definitions of cause and indeminitie, advisory committee procedures. There is much more advisory committee oversight than there was, and I suspect it's driven by LPs who have been involved in tricky fund restructurings in recent years," says Marriott.

LPs also place more emphasis than ever on the people, likely the unsurprising result of a number of high-profile professionals exiting.

"Fund selection involves many aspects, but a stable team, with skills and resources that are genuinely relevant to developing the targeted opportunities, is clearly an important consideration," says Pantheon's Wright.

The concerns are manifesting themselves in fund documentation, according to SJ Berwin's Blake. "The precise way in which keymen clauses are put together is being considered in some funds, with some preferring a vote to terminate, rather than a vote against termination, where the clause is triggered," he says.

And it's not just about the keymen, but also the tier-2 heavy lifters: are they properly incentivised? August spreads carry widely ­ even non-investment professionals are part of it.

Finally, it's down to trust. "We said we'd launch on 1 March and that we'd hold a first close on 30 June," says Battcock. "No one believed us, so when we did actually send out our PPMs on time, investors noticed. When we said we'd respond to RFPs within 48 hours and truly did so, investors were impressed. When we announced our first close on 30 June, LPs really rushed in, because they believed us."

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• Topics
• Fundraising
• Top story
• Equistone Partners Europe
• Advent International
• SJ Berwin
• BC Partners
• Apax Partners
• Cinven
• Permira
• Abris Capital Partners