February 23, 2015
Interviewed by: David Snow
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Mapping a Vast Fundraising Landscape

Three fundraising experts discuss the vastness and importance of the U.S. fundraising market, particularly for foreign private equity firms seeking to grow. Also, Mona Marquardt of Abbott Capital Management, Mounir Guen of MVision, and Richard Kunzer of BC Partners discuss the challenge and opportunity presented by a mere 50% re-up rate among LPs, why the U.S. has historically been a go-to market for non-U.S. private equity firms, and why it’s critical to be aware of hot topics among LPs.

Three fundraising experts discuss the vastness and importance of the U.S. fundraising market, particularly for foreign private equity firms seeking to grow. Also, Mona Marquardt of Abbott Capital Management, Mounir Guen of MVision, and Richard Kunzer of BC Partners discuss the challenge and opportunity presented by a mere 50% re-up rate among LPs, why the U.S. has historically been a go-to market for non-U.S. private equity firms, and why it’s critical to be aware of hot topics among LPs.

Mapping a Vast Fundraising Landscape
Fundraising in the U.S.

David Snow, Privcap: Today, we’re joined by Mona Marquardt of Abbott Capital Management; Mounir Guen of MVision; and Richard Kunzer of BC Partners. Everybody, welcome to Privcap today. Thanks for being here.

Unison: Thank you.

Snow: We are talking about arguably the most important fundraising market in the world for private equity, and that is the U.S. market. Even if you are a non-U.S. private equity GP, you typically have to come to the U.S. to get a lot of your capital or a substantial part of or your capital. So, we want to have a conversation among you three fundraising experts to understand better the dynamics of today’s U.S. fundraising market. Why don’t we start with a question for Richard? Your firm, BC Partners, is a European firm and yet you live here in the U.S. and a substantial number of your investors are from the U.S. Set the stage by walking us through the importance, historically, of the U.S. market for non-U.S. private equity.

Richard Kunzer, BC Partners: Yeah. The U.S. markets traditionally have been one of the most important markets. What you find now (and this is something we can talk about in another panel or later on) is there’s the emergence of other areas of the world—sovereign wealth funds—but at the end of the day, here in the U.S. you have the public pensionfund system, corporate pension funds, fund-to-funds, endowments, foundations who have been investing in private equity probably many years longer than anyone else globally. [It’s] very sophisticated, a very deep and very wide market. So, every private equity fund—whether it’s buyout, venture or fund-to-funds—really needs to be in the market and focusing on the market.

Mounir Guen, MVision Private Equity Advisers: The U.S. has some of the oldest gatekeepers and consultants in the industry. And their client base is an international client base. So, by default, even right now, where we’ve got Australian general partner clients, their Australian investors are being consulted and the reports analyzing the fund are being done by U.S. gatekeepers.

Mona Marquardt, Abbott Capital Management: I think the first step is for GPs to figure out what they are offering and how that fits best with a subset of prospective investors. And…it’s down to the GP to understand their positioning, which is obviously not just the potential returns or potentially attractive returns you’re offering, but what will be the perception around your risk profile. What diversification are you going to offer? What exposures are you going to offer to markets or sectors that investors may not traditionally have? Then, keep an eye on headlines. Keep an eye on who are your competitors. Where are they getting traction? What sorts of investors-gatekeeper conversations might you be hearing about that you want to get in on?

I do think there is an opportunity to consider focusing trips geographically in the U.S. to a certain extent, and not necessarily hitting the heaviest, most heavily trafficked markets. There are so many pockets of investors in the U.S., and if you only go after the elephants, you might actually miss some very attractive opportunities. And, as we all know, elephants can be exciting if it’s $100 million, but that’s also a binary outcome.

Snow: Moose, there’s an important dynamic—not just in the U.S. market, but everywhere—which is that something like 50% of LPs don’t come back to a GPs next fund. That can present both a challenge for a GP group and also potentially an opportunity for a newer group that’s looking to make new relationships. Can you walk us through how that dynamic works?

Guen: Historically, the mortality and the melt, which is the number of names coming back or the currency you get back, whether you’re in dollars or Euros or whatever the currency you’re raising the fund in is. The historical differential was about 20%, and in the last five years or so, it’s been closer to 50%. So, it’s really important to realistically view your existing investor best. To work with an assumption of a 50% melt within that structure—if that’s not the case, then at least you’re oversubscribed and you’re doing very well and there are certain positive aspects to it. If that is the case, you’re prepared for it.

Marquardt: I think U.S. investors—and Richard, you might have a point of view on this—are looking increasingly to see the world in terms of their portfolio to make sure they have global diversification and exposure. So, for a GP outside the U.S., there might be the opportunity to fill a hole, to meet a need that hasn’t been addressed previously, even in an LP—

Kunzer: I think that’s absolutely right. One thing we’ve seen in our last fundraising and just from continuing to talk to investors and be out speaking with a number of people across the market, is that they feel they now have the expertise to allocate to not only a Pan-European large buyout fund like ourselves, but to certain other funds in regional markets in Asia, South America or wherever it might be. They’ve got that expertise because they’ve learned over the last few years.

And one thing I’ve noticed is a big change is that, since the financial crisis, people are much more willing to cut long-term relationships and focus on core or new relationships. I’m sure you’re seeing this when you’re bringing funds to the market, that in the past there was a lot of, “This is a long-term relationship. We’ve had it 20 years. We’ve been with them. We’ve made good returns.” They go in and do their due diligence as though it’s a new fund and there is a lot of time and effort spent on that. And people are willing to say, “No, we’re not going to re-up. We’re going to look at X, Y, and Z in the market instead.”

Guen: So, in the U.S., one thing that’s keeping the market going in a vibrant manner is that there’s a lot of new capital actually coming to market. There’s new state funds. There are a lot of new municipal funds, and where in the old days, some of the smaller consultants would write tickets of 15, they’re writing tickets of 150 today. So, you’ve got a very interesting dynamic taking place.

But, on the flip side of the coin, at the very longer-term oriented investors—especially some of the larger investors—some of the diversification you’re seeing to the non-U.S., non-European marketplace where a lot of them were 0% to 3% in total exposure and moving to 10% ultimately 20%, right? But, within their core portfolios over the length of their programs, they will have had over 120 to 150 relations and they’re reducing those to 50 to 60.

So, one tactic we look at is [what] we call the “mega-investor approach,” where we spend time with the general partner to see how comfortable they are with a 10% investor, a 15% investor or a 20% investor.

Snow: I have a question for everyone—and maybe we can start with Richard—about the amount of time spent in the U.S. market talking about your home market. What you want to talk about is your track record, your portfolio companies, but you might get a lot of questions about, “Tell me about the German economy.” Or, “Tell me about the Chinese economy.”

Kunzer: Or, at the moment, Greece.

Snow: Right. So, how much time, and how prepared should a GP be to discuss macro elements that might not necessarily be overly impactful of their specific—?

Kunzer: As any GP that is not North American, coming into the North American market needs to be completely cognizant and very prepared to talk at length about their home market. Because that’s what—I hate to use the word saying you’re selling, but that’s what people are looking at. What is the opportunity in your market? Saying to us, “What is the opportunity in Europe? What are the risks? What are the concerns? At the present moment, what is with the Greek economy and the Greek political viewpoints on the bailout and the negotiations around that? What is that going to do to the Euro?” What is that, therefore, where there to be a lot of hypothetical questions.

Kunzer: Just to give an example of that, I was talking earlier today with an investor who’s not actually one of our present investors. They were explaining that, recently, at a proposal to make a fund commitment, the board was very concerned about what is the risk of the Euro. We’re U.S. dollar investors. How’s that going to impact us? It is beholden on the GPs to help form an opinion on that for that investor because, at the end of the day, they are also going to have to translate that to the board or the investment committee.

Guen: The advice we always give the general partners is, every morning—whether it’s on your iPad, your iPhone or in the coffee shop or local newspaper shop—go and read all the headlines of all the local and national newspapers, because the headlines will be the topic within the meeting. Then, the other thing is, you have to look at it and you have to talk to the audience you’re addressing. So, if you’re addressing a U.S. audience, which is the subject of our discussion today, it’s dollar returns that matter. And, if you’re in a multicurrency-type exposure or a fund that has volatility in its local currency, they want to know how they can protect their dollar returns. You need to be able to answer those questions.

Snow: LPs talk to each other. They form opinions based on opinions shared among each other. So, it’s important that someone raising funds from LPs is where the hot topics that are circulating. What are some examples of recent hot topics where a GP would be welladvised to have the right information when that topic came up in a meeting? Mona, does anything come to mind?

Marquardt: Yeah, a few things come to mind. I think hot topics are global; they’re not just about the U.S. But, as you said—greater press, more industry rags, more publicity, the ilk of being very visible and vocal does make the topics hotter in the U.S. Certainly a focus on fees recently, and not just absolute level of fees, but appropriateness and disclosure of fees. And LPs wanting to make sure they’re not paying for something outside the fund in this goaround that was covered by the management fee in a prior fund, for example. Transparency, in general, particularly among the public funds I would say, where there’s very high aversion to headline risk and concern about understanding what they’re actually getting into.

Snow: Moose, a final question for you. [Are there] any other hot topics floating around out there that a GP should be aware of if they’re about to fundraise in the U.S.?

Guen: The ability to be clear on what you can perform going forward and to show how and what you’ve done to be able to achieve consistent performance. And one of the aspects that is very important for international funds—the Europeans have understood this. But, when we go to emerging markets, the very first thing we show, the very first slides, aren’t the performance or the strategy. It’s the infrastructure—to show that we can report. We can work with you a GP because the investors do ask that, and to have that transparency of that reporting. It’s interesting when we do the onsite due diligence, the first session is all about the structure.

Snow: All you guys are real private equity—

Guen: Yeah. Because otherwise you have two days of onsites and then they leave and they’re not comfortable. So, you address that straight away, the institutionalization of the firm. And the confidence of the firm is institutionalized and, after that, it’s an easy or easier process.

Kunzer: Never say easy.

Guen: One thing that’s important to us is to be able to understand the global dynamics. And to be able to understand how capital flows, how it processes, how it thinks and what’s vital to it. Then, to help guide our clients—our GP clients, I should stress—through those types of unchartered or chartered waters and navigate the process to an ability to delivery for them in a realistic timeframe, to a realistic result.

On the other side of the equation, it’s very important that the investors are really well understood and their processes are respected. And that we work to try to make life easier for them by anticipating some of their issues and their questions, understanding their programs and what works and what doesn’t work and being able to help their programs achieve their targets through the introduction to the right strategies.

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