Fundraising has been buoyant for several years and, three weeks into 2018, shows no signs of abating. According to Pitchbook, in 2017 EUR77.6 billion was raised by 117 European funds which was lower than the record EUR96.2 billion raised by 140 funds in 2016, but still very high by historical standards.
We rigorously track and maintain forward calendars of when funds are expected to raise so that we can help our clients plan ahead with the aim of gaining access to top-tier funds. It is clear that 2018 is already shaping up to be a very busy year. There are a significant number of funds expected to be back in the market this year. However, at this stage, given they are generally smaller than many of the Pan-European large funds that raised over the past couple of years, it seems less likely that the value raised in 2018 will reach the lofty highs of 2016. If the pace continues throughout 2018, the number of funds raised could still be relatively high. The last time we saw anything like this level of fundraising was back in 2007 when EUR78.6 billion was raised by 255 funds. At this level and speed of fundraising, it feels very frothy and it seems, in some respects that we have been here before.
Having advised clients on private markets for 20 years, we are seeing some familiar trends emerging. The first is that some funds are coming back to market earlier than anticipated. A cynic would say that some GPs are taking advantage of the positive fundraising environment, and on many occasions it certainly feels like it. The other trend is an increase in the number of first-time funds coming to market. Perhaps not that surprising, as when the market is buoyant it is undoubtedly the best time to raise a first-time fund. The last time this many first-time funds came to market was back in 2006/7. It is important for LPs to note that whilst many good funds began life back in 2006 and 2007, there are some that were raised that are no longer successful.
A cynic would say that some GPs are taking advantage
of the positive fundraising environment,
and on many occasions it certainly feels like it.
Also evident is an increase in fund sizes, which have crept up in some cases as investor appetite for a fund has grown. Growing your fund size over time is a natural progression but this should be monitored to make sure the size still fits the GP’s strategy and capabilities. Fund size increases of 50% should not automatically be the new norm.
Fund terms also change depending on the point in the cycle. Prior to the Global Financial Crisis (GFC), terms were definitely in the GPs’ favour while it swung back towards LPs immediately afterwards. Thankfully today we haven’t seen all the bad practices of the past re-emerge. However, the pace of fundraising is fast and furious and LPs have to be ready by having identified and developed a relationship with the funds to which they want to commit.
Today, top-tier GPs find raising capital is incredibly easy. However, having to deliver the news to an existing investor that you can’t accept their request to double their allocation to a fund cannot be that much fun. The best managers are significantly over-subscribed and, in many cases, that is before they even open up the fundraising to new LPs! In today’s world, the best GPs are in a position of being able to select their partners, and constrained access is once again an issue for those that do not already have a relationship with top-tier managers. GPs are in a strong position if they have the track record and reputation.
With all that’s on offer, it could be said that LPs are spoilt for choice but today LP demand is also high due to several factors such as new entrants into the market, increased allocations from existing LPs and, in some cases, LPs concentrating their portfolios by looking to commit more to a smaller number of top-tier managers. The LP demand side also has a pre-GFC bubble feel to it.
Today’s fundraising environment is very frothy and it is difficult to know what will cause it to change. It really should be a case of buyer beware. LPs need to remain disciplined and select their partners carefully. Unfortunately, the positive economic environment won’t last forever and investors will need GP partners that can handle the good and the bad. Ultimately it is important for both LPs and GPs to choose their investments wisely.
Inquiries or comments concerning this article may be addressed to:
Managing Director & Head of EMEA Advisory Services
Pavilion Alternatives Group Ltd.
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