Pitchbook Q&A: Sixpoint’s Eric Zoller weighs in on PE fundraising

Read Sixpoint Founder & Partner Eric Zoller’s feature interview below or on Pitchbook:

Eric Zoller is founder and partner at Sixpoint Partners, where his responsibilities include global distribution, fund origination and making investment decisions. With a focus on the middle-market PE industry, the global investment bank targets a wide range of sectors, strategies and geographies.

PitchBook caught up with Zoller to discuss the recent PE fundraising environment, what LPs are looking for when they allocate their capital and how the middle market is responding to it all.

The interview below has been edited for length and clarity.

With so much dry powder in the PE industry, how would you describe the fundraising environment this past year?

“The fundraising markets have obviously continued to have very strong momentum. That has been driven by the increase in private equity allocation on the part of many existing allocators and new entrants into private equity, which has been somewhat underreported. The growing number of family-office aggregators, pensions and others that have reallocated from fund-of-funds or reoriented some of their consultant relationships and gone direct is helping drive the overall allocation to PE.

What’s been the impact of all this dry powder? The continued rise in high valuations. As a result, investors are earmarking their investments toward asset classes and strategies that can take advantage of a higher-multiple environment. That’s why, for example, we’ve seen continued investments in the technology sector; it’s an industry that’s continued to receive a lot of attention and capital despite high valuations. People think if you’re going to pay up for a company and pay for a high multiple, you might as well get the growth that’s associated with that. The technology sector generally has a lot of that growth.”

What are LPs looking for when they allocate their capital? Have those needs changed in this robust fundraising environment?

“That’s a great question. Investors’ underwriting criteria has changed a lot over the last two years and certainly over the last year. Because there’s so much demand with investors coming to the market, LPs are getting cut out of certain funds and they must, to a degree, soften some of their underwriting criteria in order to keep up with the pace of fundraising and allow themselves to get into those funds. So, despite so many GPs coming to market earlier, LPs are more willing to accept portfolios with less liquidity or development than they did in the past.

How have investors’ needs changed during 2017? They’re more willing to invest in funds that have less liquidity or less realizations and in portfolios that are less mature. Because investors are getting cut out of a lot of funds, they are investing in them earlier in the spectrum and also investing in spinouts, because they want to build those relationships while the access is available. And in that case, just the underwriting criteria for spinouts has changed. It used to be that investors were looking for a fully built-out team and track record. Today, investors will take a bit more risk on team and track record development.”

Has the fundraising environment put more pressure on middle-market PE firms to raise more? Or are they content to stay with their previous status quo?

“There are two dynamics driving middle-market sponsors to raise more capital. One is the development around GP liquidity. You see many different firms coming in and buying minority stakes in upper-middle-market sponsors. That’s creating desire on the part of other middle-market firms to aspire to achieve GP liquidity down the road, and they know the way to do that is to raise more assets. So, for those firms that want to build terminal value with their firm, there’s a correlation between terminal value and total AUM. They need to raise more assets in order to attract an investor down the road in their management company.

The other dynamic is the frothy markets. People are paying up for companies, and they’re putting up money more quickly. The result is that they’re coming back to the market earlier, given that LPs have softened their underwriting criteria. It’s allowing them to come back sooner and raise more capital more quickly.”

Sixpoint Partners, LLC, is a registered broker/dealer, member FINRA (http://www.finra.org) and SIPC (http://www.sipc.org). Sixpoint Partners Asia Limited is licensed by the Securities and Futures Commission (http://www.sfc.hk).