Fund Launch Strategies and the Impact of Raising Your Fund in 2016 vs 2017
Recent market headwinds have caused LPs to adjust their allocation to private equity and to adopt a more defensive posture. The 2010-2015 expansion was marked by increasing PE allocations, strong exits and new fund launches. The oil bust has not ushered in a corresponding PE sell-off or downturn (with the exception of the energy sector itself) though the market has certainly plateaued, for the moment. 2016 is about acquisitions not exits; PE distributions will be flat to down and therefore so too will LP commitments. Demand for consumer and industrial strategies remains robust in certain corners of the market but demand for deep value, healthcare and special situations is omnipresent.
In addition, LP pipelines for sector-focused middle market buyout funds, especially those in the strategies outlined above is currently very weak. There is simply a dearth of high-quality sector-focused middle-market buyouit funds in the market or coming to market over the coming quarters. This “window” is closing and the fundraising landscape by most measures will quickly change by the first half of 2017 when a higher volume of GPs are expected to come back to market.
What does this mean to you as you approach the minimum invested capital thresholds of your current fund? Just because your LPA requires 60-80% of committed capital before raising a successor vehicle and you are only 30-50% of the way there, doesn’t mean that you are out of options or that you should be sitting “heads down” on your portfolio.
It may be appropriate to solicit your Advisory Board’s feedback and consider a “dry close” at a lower committed threshold. You may be surprised but in this market, an early launch may help your LPs fill their calendars. In such a case, you would not turn on the new fund or accrue fees until the existing fund reaches its stated threshold in the LPA. At the same time however, you can manage the fundraising process more strategically and begin an intimate conversation with LPs. Issues like fund size, terms, timing, and other matters are more easily handled in a less competitive environment where the LP has fewer investable options. With proper pre-marketing, a manager can launch Q2 and still hold a close in 2016 to get a jump on the 2017 calendar.
Top decile funds may not worry about timing. In their case, the fundraising solution of choice could be engaging a placement agent for a processing role. A processing role typically involves a pre-negotiated flat fee and entails the placement agent assisting with LP due diligence requests, managing the closing process with existing and new LPs and ultimately acting as a back-stop for the fund manager in case their existing support falls short and a significant amount of new capital is required. This is a cost effective and administratively advantageous approach when the existing LP demand base for your next fund is very high.
Next on 60 Seconds with Sixpoint: Demand for passive minority stakes in the management company of a high-quality GP: opportunities and risks.