Change in attitude needed for future fundraising

Funds need to get back to basics, according to Mike Chalfen, general partner at investment house Advent Venture Partners: "During the market's heyday, many funds raised as much money as possible. This meant they had to adjust their investment strategy to suit the pool of capital and to deploy it quickly, rather than have a clear strategy for which one raised a suitable amount of money," he explains.

Indeed in the boom years of 2006 and 2007, €68bn and €65bn were raised respectively for European private equity Buoyed by exceptional and fast flowing returns, investors had flooded private equity funds with liquidity during that time, ramping up their over-allocation strategies.

But the credit crunch and subsequent turmoil of the world economy has certainly put an end to that. The latest fundraising stats from unquote's European Fundraising Review 2010 confirm what everyone already knew: LPs have kept their wallets closed, making 2009 a truly dire year to have been on the fundraising trail. Total capital raised for European funds came to €23.2bn, down 76% from the previous total and the lowest amount raised since 2004.

It seems the time for -bloated funds is over, with many now being, questioned on the proportionality of their fee structure. Furthermore, anecdotal evidence suggests that LPs are now reticent to tie up their capital in 10-year fund allocations, leaving them exposed to fluctuations in the macro-economy.

This need not necessarily restrict funds from larger investments. Active relationships with LPs that have co-investment capabilities give the funds added financial firepower, without the pressure to deploy capital that has led to the distortion of the private equity model.

Crucially, this model also has strong benefits for GPs. Says one fund manager: "Investors that want to make more money from carried interest than from management fees should raise a pot of money for their core strategy. They could then have a co-investment agreement with their LPs to draw down on a deal-by-deal basis. This ensures it fits their strategy; only calls down where additional capital is required; and sets out different economics for co-invested capital."

Indeed such a model seems to tick a lot of boxes, for GPs and LPs alike. On the one hand, GPs are able to retain control of an investment as they are not sharing larger investments with additional sponsors. On the other hand, such an arrangement satisfies LP desire for shorter investment periods on some of their private equity allocations.

"Raising the right amount for a firm's core strategy leads to much better alignment of interests for all stakeholders, but specifically also has clear benefits for GPs. We will make better multiples and so more carried interest if we're focused on a clear, capital efficient investment strategy" Chalfen concludes.

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