Private equity firms adapt to a ‘new roadmap’ for fundraising

• Co-investment opportunities considered key to attracting LPs

• New LP relationships will dominate one-in-five new funds

• Fundraising sentiment improves among GPs worldwide

• Dividend recap volumes set to increase as LPs push for distributions

Private equity firms around the world are adapting to a “new fundraising road map”, according to the 2013 Global Private Equity Report, released today by Grant Thornton. Now in its third year, the report is the result of 156 in-depth interviews with senior private equity practitioners around the globe.

The report provides insight into private equity general partners’ expectations for numerous aspects of the fundraising and investment cycle. This year the report takes a closer look at fundraising and reveals how private equity firms are adapting their approach to increase their chances of a successful fundraise. 

Fundraising sentiment

While the private equity fundraising environment around the world is still seen as challenging, there has been a marked improvement in sentiment across all geographies since last year’s report, with more than half of the executives surveyed (54 percent) having either a positive or neutral outlook. This compares with just a quarter (27 percent) last year.

How do you view the current fundraising environment?

 2013 2012 2011

Very Positive 0% 1% 4%

Positive 29% 11% 24%

Neutral 25% 15% 26%

Negative 33% 33% 33%

Very Negative 13% 39% 13%

Source: Global Private Equity Report 2013/14, Grant Thornton

“There is a brighter view of the fundraising environment across nearly all the major private equity markets in the world. The percentage of respondents describing the environment as positive is up in North America, Asia Pacific, Middle East & North Africa and even Europe,” said Martin Goddard, global service line leader, transactions, Grant Thornton International Ltd.

 Fund structures changing

A majority of GPs around the world (56 percent) predict an increase in the use of alternative fund structures over the next three years, as limited partners explore options beyond the traditional 10-year blind pool fund. The alternative structure most commonly cited by GPs is deal-by-deal, whereby investors are presented investment opportunities and can either opt in or out on a case-by-case basis. 

“Some GPs note that while there are disadvantages to most fund structures, alternatives to the limited partnership can provide a means to: tailor programmes to an individual LP’s needs; adopt a flexible approach to match market circumstances, for GPs to access carry more quickly than via a 10-year fund; and make investments in areas out of favour with LPs and which therefore would not fit in a blind pool model. In the majority of cases, GPs point to deal-by-deal fundraising as being the most common alternative to the limited partnership.” – Global Private Equity Report 2013, Grant Thornton

Fundraising: longer, slower, harder

While there is more general positivity around fundraising prospects, there is also a recognition among the survey respondents that the process has become costlier and more onerous. Many report that the distinction between “fundraising” and “investor relations” had become more blurred and fundraising is seen more as a constant process of relationship building and reporting rather than a cyclical exercise. 

“Momentum is widely understood as a prerequisite for  successful fundraising. An early first close on a good proportion of the target is often seen as key to how the process is perceived and, therefore, whether other LPs will feel confident enough to come on board. Much of the drive for momentum is rooted in extended LP pre-qualification and pre-marketing phases, as well as ensuring likely information requirements are prepared for ahead of the ‘official’ launch.” – Global Private Equity Report 2013, Grant Thornton

As well as ensuring they are fully prepared for the official launch of their fundraising, GPs are considering alternative incentives to attract new investors. Co-investment opportunities are the most commonly cited strategy. 

Which of the following strategies are you considering using as part of your next fundraising to help attract investors?

Co-investment opportunities  35%

Advisory board representation 27%

Early-bird discount/ fee concessions 16%

Greater GP commitment to fund 14%

Segregated accounts  8%

Source: Global Private Equity Report 2013/14, Grant Thornton

“With the power shifted to the LP, GPs are reconciled to accepting new demands or offering incentives and concessions (fee discounts, advisory board seats, co-investment rights, etc), encouraging LPs to commit, especially ahead of the important first close.” – Global Private Equity Report 2013, Grant Thornton

When asked to compare their most recent fundraise with previous experiences, private equity firms most commonly cited the amount of due diligence by prospective LPs as an area where the process had changed. The time it takes to push investors over the line and the sheer number of LP meetings, were also areas where changes were noted. 

How did your most recent experience of fundraising differ from previous ones? 

Extent of LP due diligence (demand for information, forward pipeline visibility, LP portfolio visits, dataroom strategy etc)  53%

Conversion rates (timing, size of commitment etc) 20%

Number of LP meetings (roadshows, LP visits etc) 16%

Depth and breadth of LP base contacted (type/location etc) 9%

Other  2%

Source: Global Private Equity Report 2013/14, Grant Thornton

Across the world, 65 percent of private equity firms expect to be on the fundraising trail within the next 12 months. More firms than ever (22 percent) expect their funds to be dominated by new LP relationships. 

 What proportion of your next fund (by percentage of investors) do you expect to be first time investors with you?

Proportion  2013 2012 2011

Majority  22% 18% 16%

Half 21% 18% 8%

Significant minority 22% 27% 28%

Minority  33% 35% 44%

None 2% 2% 4%

Source: Global Private Equity Report 2013/14, Grant Thornton

Dividend recaps set to rise

By far and away the most common “pressure point” in the GP-LP relationship is the question of distributions and exits, with 23 percent of respondents citing this as being the area of most LP pressure. This is followed by the firm’s strategy in light of market conditions (13 percent), fees (12 percent) and ESG policy (12 percent).

In light of the pressure for exits, it is perhaps unsurprising that the majority of GPs (51 percent) predict there will be an increase in dividend recapitalization activity over the next 12 months. Only 2 percent expect there to be a decrease and 47 percent expect activity levels to stay the same. The bullishness was most pronounced in North America, where 64 percent of GPs are expecting an increase.

The wider private equity environment 

As well as assessing the market for private equity fundraising, the Global Private Equity Report delivers an in-depth examination of prospects for deal flow, access to debt finance, exit activity and portfolio company performance drivers. 

“While the results from our third annual global private equity survey indicate that there numerous challenges facing the industry remain, there appears to be signs of growing optimism amongst respondents, suggesting that perhaps we are at the dawn of a new phase of increased activity, especially in the core private equity markets of North America and Western Europe.

“With the continuing improvement in debt markets in North America and the potential follow on impact this may have globally, as well as signs of positive economic news from Europe and sustained high growth rates across the Asia Pacific region, there appears to be supporting evidence underpinning these early signs of returning confidence.” – Global Private Equity Report 2013, Grant Thornton.

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Sample and methodology

Between July and August 2013, 156 interviews were conducted with top executives from private equity firms. Respondents included general partners in seven principal regions: 

29% Europe
21% North America (USA and Canada)
22% Asia Pacific
10% Middle East and Africa
6%  India
9% Latin America
3% Russia/CIS

Interviews included a mixture of quantitative and qualitative questions. Arbor Square Associates, an independent research firm, conducted the research.

Download a copy of the full report.