January 18, 2013
Interviewed by: David Snow
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Fundraising New Rule: Expect Everything to be More Difficult

“The New Rules of Private Equity Fundraising” is a five-segment thought-leadership series that presents new rules for GPs trying to win capital commitments in a changed private equity investor landscape.

Rule #1: Expect everything to be more difficult. Analyzing this market reality are experts John Greenwood of Pantheon Ventures, Mounir Guen of MVision Private Equity Advisers, and Russell Steenberg of BlackRock Private Equity Partners. The program concludes with an expert Q&A with Mounir Guen of MVision, sponsor of this series.

“The New Rules of Private Equity Fundraising” is a five-segment thought-leadership series that presents new rules for GPs trying to win capital commitments in a changed private equity investor landscape.

Rule #1: Expect everything to be more difficult. Analyzing this market reality are experts John Greenwood of Pantheon Ventures, Mounir Guen of MVision Private Equity Advisers, and Russell Steenberg of BlackRock Private Equity Partners. The program concludes with an expert Q&A with Mounir Guen of MVision, sponsor of this series.

David Snow, Privcap: Today we are joined by John Greenwood of Pantheon Ventures, Moose Guen of MVision Private Equity advisers, and Russ Steenberg, of the BlackRock Private Equity Partners. Gentlemen, welcome to Privcap today. Thanks for joining us.

We are talking about fundraising. It’s a hot topic. And the world has changed with regard to fundraising. There are now new rules if you want to try and raise capital for a private equity fund. And we’re going to talk about those new rules.

And all of you are exceptionally qualified to talk about these new rules, being engaged as you are with LP community and really knowing what it takes to raise a fund. So why don’t we start with private equity fundraising rule number one– or rather new rule number one. And that is, everything is harder, further, longer, costlier.

I know that’s sort of a broad rule, but I think it’s a true one. So why don’t we start with Moose. What does that mean and why is everything harder, further, longer, costlier to raise a private equity fund.

Mounir Guen, MVision: Well, I think one of the aspects that we need to consider when looking in the marketplace, a fundraise, normally when we do the marketing plan, is a 12-month process. You prepare up to three months. You then, within that, might have some selective pre-marketing. You then launch the fund. There’s an introductory period that can be one to three months.

There’s a diligence period, which could be two to four months. And there are closing periods that follow that, which they call legal reviews, that can be one to three months. So when you kind of aggregate that on average, you’re working with a 12-month model, more or less.

In today’s marketplace, there are a couple of triggers that make it more challenging in the current environment. The first is the fund size. I was, until yesterday, going around saying that if you are going to raise about $3.5 billion US, there are basically 20 investors globally that will constitute the main portion of that. And a number of them are gate capped.

If those 20 don’t common rate you number one core holding, you have gaps. And to fill those gaps, you then have to find alternatives. And the only way to fill them, because there is a lack of other mega investors, is by going to a broader list of people. And that then completely changes the topography and the dynamic of the fundraise. Because you’re now dealing with hundreds, and hundreds, and hundreds of names, all of which need to be processed in their own scales and requirements.

Now what that means is that the general partner’s traveling more extensively. So the general partner has longer lists to reviews, more to-dos to deal with, more next steps to think about. And one of the things the investors are very sensitive to is the response times.

Which means that, in terms of having IR capabilities, in terms of putting resources to the fundraise to be able to deal with that type of dynamic, a lot of general partners aren’t realizing the amount of people they need available to be able to go through that process, let alone if they also hire agents on top of that.

Snow: Russ, do you agree? And can you add to the idea that everything is now harder in the fundraising market?

Russell Steenberg, BlackRock Private Equity Partners: I would agree. I think Moose has laid the process out very well. The saw that exists in the marketplace today is, for a general partner raising capital, is twice the time and half the amount. Now whether that turns out to be true or not is another issue, because there is also bifurcation in the marketplace between brand name funds that are going to raise their capital probably in close to terms that they want. And then there’s everybody else that is struggling to get to the targets they want.

But every year we do a survey of the private equity community. Last year what it was telling us when we talked with the limited partners is that, if they looked at their portfolio, they either liked the names that they had in their portfolio, but their allocation amounts were down. So that they were going to give less money to the same names that they had, who would be coming into the marketplace– not everyone in the portfolio comes into the marketplace.

Or they only had so much money, their allocations were down in some cases. Although there is some instances where people are starting to expand the private equity portfolio– we can come to that in a minute if you like– where they’ve decided that they’re going to prune their portfolio.

Snow: John, what are you seeing by way of harder, further, longer, costlier in the private equity market?

John Greenwood, Pantheon Ventures: When we talk to limited partners– and I speak to a lot of limited partners in Canada– I think that it reflects lot of the things that both Russ and Moose have said. Their portfolios are much more mature than they ever have been in the past. The typical limited partner that we’re looking at is looking to reduce the number of GP relationships that they have. So if you’re a new GP to that of LP, it’s very difficult.

Not only do you need to impress them that you’re somebody who deserves their allocation of capital, you also need to demonstrate that you’re probably going to have to replace another GP relationship that fund manager has. I think one of the other things that we’re seeing in Canada that may be a little bit different than what we’re seeing in some other parts of the world is, we’re seeing a pretty different operating model with a lot of the pension fund managers in Canada.

We’re seeing a number the Canadian pension funds are looking to dis-intermediate general partners. I mean not only funded funds, but also general partners. We’re seeing a number of Canadian pension plans who are looking to either have a meaningful amount of their private equity invested through co-investments or directly leading transactions. So I think we’re seeing that maturation and sort of shrinking of the opportunity set for where GPs can find money.

Steenberg: But unlike a lot of other places in the world, the Canadians have, in my view, been smarter. The large organizations have been willing to bring in experience and capabilities that allow them to do that. Whereas in other parts of the world, there are large pools of capital that have the same desires, but don’t have the skills and capabilities.

Snow: So fortunately, for the GP world, the globe is not going Canadian by way of the dis-intermediation that this cannot be replicated across the world.

Steenberg: They may want to.

Greenwood: Yeah. I think there’s a sense that Canada is entirely going direct. It’s a very small number of large, sophisticated players in Canada that are looking to go direct.

Yeah. You might need to borrow a finger off the other one, but that’s about all.

Steenberg: Fair point. Fair point.

Guen: But the point that they’re both making, which is an interesting one, is you have to realize that the bulk of the capital that we’re targeting for general partners, or general partners are targeting, is actually US capital. And a large percent of that is direct or indirect, state and municipal capital.

Steenberg: That’s right.

Guen: Which means that, if you are an international general partner in Australia, in China, in Germany, or in the UK, you will need to have somewhere around 10 trips to the United States to meet the gatekeepers. Even though they have offices abroad in your continent, you want to meet other members to get consensus within them.

You have to meet with the investor a multitude of times, culminating with a lot of these public pensions now, in a presentation to the boards, which is publicly taped. Which then others can see, and see what you’re saying, and how you’re presenting. Which is interesting also.

Snow: So add, and more famous to the list of  things.

Guen: That’s right. That’s correct. But you see, the point then is, if that investor base doesn’t give you the capital that you’re seeking, general partners are then trying to hope to go more remote. And they will see them in Colombia. You’ll see them in Peru. You’ll see them in Chile. You’ll see them in some different areas of Asia and Korea, always trying to find that marginal capital to be able to achieve their goals.

And at that point, the fundraise takes an extremely different dynamic. And there are a number of complexities that are raised, because the capital has different processes and different criterion.

Steenberg: Moose, to come back to your US comment, and it is true. A lot of capital is in the US. But if you’re trying to raise a fund that’s $3.5 million or over into that category that you started with, you have to play in a global fundraising ma marketing campaign, that so that’s not just in the US.

Guen: That’s correct, but the investors follow a certain sequence. So you need to make sure that you have the key US names and their gatekeepers–

Greenwood: You want to line– yes you want to line them up.

Guen: –and their consultants, and their fund of funds. A number of them then link to European, Middle Eastern, and Asian capital.

And so there is a little bit of a six-month lag, if you look at the cycle. So you start off with those in the United States. You then selectively go through Europe, where there’s only a few countries now that actually have–

Steenberg: That are active.

Guen: Then you go to Middle East and Asia, knowing that everybody knows you’re coming to market the same time, but the money’s processing in a certain style or a certain cycle.

Expert Q&A With Mounir Guen, Founder & CEO, MVision

Privcap: What makes MVision unique? 

Guen: We really believe in what we do. And we believe in those that we represent. And that passion is very important today to differentiate when diligence processes can get quite intense. And we have to be able to have clarity of vision in understanding who we’re representing, and why we’re representing them, And never lose that through the process.

We actually have a higher component of first-time funds than many others do. And we have a higher component of geographic spread than others do. And it is very typical for us to have spent a couple of years understanding and getting comfortable with a particular potential client.

And so that when we do bring them to market, we have a very good grasp of the people, their companies, and their track records, and their experiences, their pipeline, the environment in which they are investing and active in. And that then leads to the fact that we’re very comfortable. That we’ve made a very good decision to back someone. And we believe in them.

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