LPs, GPs and Industry Advisers Drill Down on Current Trends in PE Fundraising at 2013 PE Conference

Shannon Beeman
October 10, 2013

It’s a dog-eat-dog world out there in private-equity fundraising, which has plummeted 50% since the boom era of 2008. According to current estimates, nearly 2,000 PE firms are competing to raise more than $700 billion in fresh funds, and the majority of them are coming up short. The average time to raise a fund has doubled over the past seven years.

Moreover, with limited partners driving harder bargains, the share of transaction fees being rebated to LPs has grown ─ to almost unsustainable levels, some GPs contend. Since 2011, general partners have given 75% to 100% in fee rebates to LPs. Further complicating things, the days when GPs negotiated a single set of deal terms with all their limited partners at once are long gone. Now, most general partners are compelled to negotiate individually with each LP and to sweeten the pot through fee offsets and other concessions on a case-by-case basis.

At the 2013 Michigan Private Equity Conference, a panel composed of public, corporate and private LP investors, a fundraising advisor and a PE fund manager discussed significant changes in the PE fundraising environment and current trends driving today’s investment market.

“The LP community is no longer monolithic, and we’ve seen limited partners become less aligned with each other while gaining more power to negotiate better terms,” commented Shawn Winnie, senior portfolio manager for the state of Michigan Department of Treasury. “Right now, we’re decreasing our commitment to private equity and waiting for fund managers to get our money back.” Winnie said the state has set a target of investing 16% of its $51 billion retirement-fund portfolio, or roughly $8.5 billion, in alternative investments. “We’re now at 20% of our portfolio, or approximately $10 billion, so we’re not making any new commitments [to that asset class].”

“A decade ago, the PE fundraising cycle was four or five years, but now it’s longer,” noted Eric Wilcomes, director and portfolio manager at DuPont Capital Management Corp. “We’ve been consistent in deploying capital over time and maintaining a presence in all markets. We always renegotiate lower fees with our general partners, but try to build a fair agreement that is palatable in terms of economics and governance to the GP and to us as a limited partner.”

“The maturity of the industry, the growth of the secondary market and the increase in transparency across the board” are a few of the key structural changes that have occurred in the PE fundraising environment, said Brendan Edmonds, who is a partner at Atlantic-Pacific Capital, a placement agent and advisory firm that raises capital for alternative investments. “Ten or 15 years ago, LPs relied on placement agents, but now they are doing it in-house.”

Given the difficult environment for PE fundraising, how can general partners recalibrate their model to attract and retain limited partners who are willing to be long-term investors? The panelists suggested a few strategies that might be effective:

  • Better align the interests of GPs and LPs ─ “There must be alignment of interests between the GP and LP,” Wilcomes commented. “If a limited partner has no interest in an investment, it won’t invest.”
  • Build closer relationships with limited partners ─ “It is important for GPs to deepen relationships with investors, develop new relationships with potential investors and plant the seeds for upcoming fundraising,” Edmonds advised.
  • Increase transparency ─ “Capital is scarce and LPs are more discerning, so you have to let them know what you are doing,” said Brian Demkowicz, managing partner and co-founder at Huron Capital Partners.
  • Build experience and a good track record ─ “We want to know how the GP added value in previous portfolio companies and whether what they are telling us is consistent,” explained Mike Vlasic, chief executive manager of Vlasic Investments, a private family investment company. “For us, it’s more about hitting the ball out of the park.”
  • Rise above the pack ─ “There’s been a lot of doom and gloom, but I’m optimistic about the next two to three years,” Edmonds concluded. “The market is getting close to equilibrium, and the best GPs will get funded.”

For more information on the 8th annual Michigan Private Equity Conference, visit our page.