Fundraising market continues to confound

Julian Longhurst
16 December 2010

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Fundraising conditions are at their toughest for nearly a decade and the market is awash with rumours of stalled fundraising programmes. But there are also regular reports of highly successful fundraisings that fly in the face of the current trends. Julian Longhurst looks at the unpredictable market.

Throughout 2010 rumours of becalmed GPs struggling to attract any interest from highly cautious LPs have been offset by the occasional reports of funds that simply flew from launch to closing. Among those that seemed to buck the trends were Inflexion, which closed its latest fund at the £375m hard cap after just three months, Litorina Capital and Capiton. What's more, higher up the scale, BC Partners are reported to be enjoying some success, with a close on their latest fund expected in the new year.

The latest in this trickle of good news stories came today, when the continental European mid-cap investor Argos Soditic confirmed to unquote" that it expects to close its sixth fund on a €400m hard cap in the coming days. The fund, which succeeds the 2006-vintage Euroknights V (€275m), is heavily oversubscribed, leaving Argos Soditic the awkward, but perhaps enviable, problem of cutting back approximately €400m of new commitments (ie above and beyond those from returning investors) by more than half in order to pull the fund back within its hard cap.

But while examples like this show there is appetite for the right fund offerings, the nervousness in the market means they remain the exception rather than the rule. According to one partner at a leading law firm, just one out of its dozen or so private equity clients had managed to raise any significant money in recent months.

There has clearly been some sort of breakdown between the buy-side and sell-side in European private equity. Many of the groups that have succeeded in raising capital this year did so without giving any significant ground away in core economic terms, despite all the noise being made about the misalignment of interest in fees, carry and preferred returns. Yet other groups still trying to raise capital are citing examples of LPs that seem to be more interested in the terms that look at fiduciary duty and what would happen in the case of fraud. This surely is symptomatic of some sort of breakdown in trust, but if so, it begs the question: why are LPs talking to GPs they may not trust?

Another emerging problem mentioned by a number of fundraisers out in the market at the moment centres on the fund-of-fund business. The rapid evolution in this segment caused by the downturn the subsequent drop in fundraising is leading to a highly competitive environment in which some players are seeking to influence the strategies of potential investees simply because it will make their product more marketable to limited partners - a case of sales wagging the dog. For GPs like those mentioned above, this may not be such an issue given that their offering has for whatever reason struck a chord. But for those that haven't hit the nail on the head pressure like this from a potential investor would be at the same time unwelcome but difficult to ignore.