MVision: The Fundraising Boom Should be Bigger

A veteran fundraiser explains why middle–market fundraising seems to have flatlined, and where LPs are looking to invest as mega–GPs suffer capital “indigestion.”

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MVision: The Fundraising Boom Should Be Bigger

Privcap:
The private equity market is currently experiencing a fundraising boom, but you argue that the boom should actually be bigger. Why?

Loren Boston, MVision:
If you step back and look at the overall market, as you know, we’re still not reaching the highs that we had back in 2007, 2008. The market’s good, but it’s not great. And that’s a phenomenon that’s forcing LPs to make decisions in terms of thinking about allocating capital more so than you might expect.

Stepping back for a minute, and this may be a little off your point here, but stepping back for a minute the public markets are at all-time highs by a good margin. We just saw yesterday that the NASDAQ set a new high. And with that sort of backdrop and considering that the market remains an asset-allocating driven market, you’d expect that there’d be a lot more money going into private equity. In addition, as you’re probably well aware, there’s been a lot more distributed than called in the last three years.

So between the asset allocators not allocating as much as you might expect, and the large amount of capital that’s come back into the pockets of investors, we would expect a lot more activity driving a lot more interest further down in the food chain so to speak in terms of large cap and middle market. So interestingly, the environment that we’re in right today, we’re seeing that our market is not – we’re not raising as much as we might have expected. And in part, that’s had an effect on the amount of capital going into these mid-tier funds versus the mega cap and large cap funds.

The issue is, then, why aren’t we seeing, with these conditions, a lot more money being raised? And when you cut through the data, the reason is because GPs are currently sitting on quite a bit of capital that’s been committed but is not invested. Stepping back from that, well why aren’t they investing as aggressively?

I think there’s a lot of indigestion right now at the GP level, trying to find good deals at fair valuations.

Privcap: Where are LPs who are cautious about the valuation environment committing their capital?

Boston: There is a search for new strategies and less correlated strategies, which I think does make a lot of sense in this environment. You don’t have to think very far back to the Lehman event when everyone thought that large cap was the safest place to be. When we had the correction post-Lehman of course, there was no leverage. And all the large cap players were sitting there charging their investors management fees not having an opportunity to put the money to work.

 We have the potential of that happening again if we have another correction. One of the ways that investors could mitigate that is through thinking about strategies that are new and around the edges. So of course we’ve seen the rise of income funds have been pretty big over the last couple of years. Before that, we saw a lot of, an increase in demand for infrastructure funds. But I think that there is a lot of interest in finding less correlated strategies. And regardless of sector or size, if you can show the market something that’s relatively untapped in terms of use of private equity, there will be a lot of demand.

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