April 30, 2016
Interviewed by: Privcap
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Privcap/Preqin Fundraising Roundup, Q1 2016

A new quarterly video series featuring expert analysis of recent fundraising trends and numbers. The first program features Alan Pardee, co-founder and managing partner of Mercury Capital Advisors, and Courtney Candrilli, head of U.S. sales for Preqin, and is moderated by Privcap CEO David Snow.

The program is also available as a PDF Report.

A new quarterly video series featuring expert analysis of recent fundraising trends and numbers. The first program features Alan Pardee, co-founder and managing partner of Mercury Capital Advisors, and Courtney Candrilli, head of U.S. sales for Preqin, and is moderated by Privcap CEO David Snow.

The program is also available as a PDF Report.

David Snow, Privcap:

Hello and welcome to Fundraising Roundup. I’m David Snow, CEO of Privcap. Today we are joined by Courtney Candralli of Preqin, the leading source of data and information for the alternative investment industry and Alan Pardee of Mercury Capital Advisors, the capital raising and investment advisory firm. Courtney and Alan, welcome to Fundraising Roundup. Thanks for being here.

Courtney Candrilli, Preqin:

Thank you.

Alan Pardee, Mercury Capital Advisors:

Thank you, David.

Snow: Today we’re going to be taking a close look at the fundraising  activity for private equity in the first quarter of 2016, which as we’re going to learn,  is off to a modest start. We’re also going to take a look at the rise of the road warriors. More funds than ever are now in the market seeking capital.

We are going to learn that those who close, close fast. Oddly enough, the time it takes to reach a final close has compressed and we’ll discuss why.

Finally, stick around for interview highlights with a special guest.

Okay, first off let’s learn what happened in the first quarter of 2016 by way of private equity fundraising. As we can see, we are off to a modest start. After a relatively strong Q4 2015, Q1 2016 is not doing too bad. But given some market observations, some people would have expected that we would have been a bit further along. So maybe starting off with a question for Alan Pardee of Mercury, what’s your read on the start of this year as far as fundraising goes? What’s the mood out there?

Pardee: Well I would say you’re exactly right in calling it a modest start. What’s been going on overall in the world, in August we started to have the slow down – the swoon really – in the stock market here in the United States really driven by all that was going on in the slowdown in China. And as people have come into 2016 with the concerns that relate to Asia, with the potential for Brexit in June and God knows what’s going to happen  in

the US election over the course of the balance of the year, people are  more conservative as they are looking at their allocations.

They have money. There’s no shortage of capital at the moment. It’s more of a question of a shortage of bravery.

Snow: So  it  sounds  like  it’s  not  private  equity’s  fault.  It’s  largely  the fault of external factors. Maybe Courtney, could you put it in a broader context? Preqin covers all the alternative investment asset classes. How is fundraising across the board for Q1?

Candrilli: Across  the  board,  we  are  seeing  that  the  aggregate  capital raises has fallen. It’s the lowest quarterly fundraising total since Q3 2013. If you  look at the 2015 returns that investors saw, they were very happy with them. So moving into 2016, they’re either going to be remaining in that allocation level or looking to invest more. But that again, going back to your point, is going to depend on what’s happening in the global market.

Snow: Well you bring up a good point, Courtney, on the performance    of private equity. I mean you would think that people would be more enthused, notwithstanding the macro factors. But private equity has shows itself to be a strong performer in the long term. We know that allocations are going to rise across the board for many investors, and record amounts of capital – record amounts of cash – have come back to investors from their managers. So we’ve got all this capital out there, and again, you’d think that there would be a strong re-­‐deployment of that capital into private equity funds.

Pardee: I think what we’ve really seen in the first quarter is more of a  pause than a problem. So my belief is that when we get to the back end of the year, and there is a seasonality to our business so Q4 is always pretty big, that we’re going to see a fair amount of capital come into funds as people get ready to make decisions again. And many of those will be in US funds and in European funds, more so than some other places.

Snow: Within  the  various  private  equity  sub  asset  classes  and    maybe even within the cousin asset classes within alternatives, what have investors shown more enthusiasm for lately as far as strategies?

Candrilli: Sure,  if  we  look  moving  forward  in  our  investor  outlook       the three strategies that investors are actually increasing their allocations to is private equity, private debt and infrastructure. Then if we look at the private equity subsector, first they’re as always, gearing towards those small and mid market types of investments. Secondary, they’re looking at venture and the mega buyouts. So those are their preferences we’re seeing for 2016.

Pardee: What we’re seeing at the moment is – and by geography – a bit of a rush towards the United States as the one safe haven that people are comfortable with. And within that, I would say it ties pretty much to what Courtney was just describing. Established funds are very much in favor. Two or three years ago, first-­‐time funds were en vogue. That’s not the case anymore. So Fund 3, 4, 5, 6 that’s raising anywhere from $500  million to several billion dollars, that’s where our market seems to have really decided that that’s what they’re focus is today.

Candrilli: Investors are all chasing the same funds. So we’re seeing a lot of re-­‐ups with existing managers, where they were happy with their performance, and other investors that want to get into those funds but might not have a chance. So they’re basically just looking to chase the same kind of funds with the brand names.

Pardee: I’ve spent a lot of time talking to general partners who are thinking about raising funds. And in one meeting I was in not too long ago, replicated a couple of other times, one manager was talking about how they’re only 50% invested but they’re existing limited partners and some new limited partners have come to them preemptively and said, “I know you’re going to raise a fund in a year’s time.” Here’s X, and in this case it was $300 million from both of these LPs for your new fund. Please don’t cut us back when you come to market next time. That’s a new dynamic of forward planning at that level.

Candrilli: It is a new dynamic, and I think something we’re seeing too is that GPs – if they only have a few positions open in their fund – they can select who they want that to be.

Pardee: Exactly.

Candrilli: So they’re going to different LPs and they’re picking who they would like in their fund.

Pardee: Which is in itself a strategy, to make sure you’re well diversified geographically by type, by size.

Candrilli: Yep.

Snow: I’m going to guess that the macro challenges that have hit the Western economies, which have hit the emerging economies so much harder, are causing people to really ease up on the gas pedal as far as deploying capital to emerging markets funds. Is that the case?

Candrilli: People are staying away from Asia. And if LPs are going to dip their toes in the water, they’re probably going to lean more towards North America or Europe.

Snow: I’d like to note that is not the case that in vintage years where there has been lower investor interest in certain strategies, those tend to be good vintage years to invest. And so without predicting the future too much, it could be said that the current unpopularity of emerging markets could be a signal that it’s actually a very good time to get into emerging markets.

Pardee: Exactly right. Everybody loves to be a contrarian, but most people love being contrarians when they see a whole lot of contrarians around them.

Are people beginning to get brave again? It’s beginning to feel like it. So bit by bit, I believe over the course of 2016 barring another corrective movement in the markets, we’ll probably see a lot of people starting to move again.

Snow: Okay, let’s move on to our next topic – the rise of the road warriors. Right now there are more private equity GPs in the market trying to raise capital than ever before. So I guess the question is, are these guys diluted or are they misinformed? Or are they correct in knowing that there’s capital out there for them and their rational economic actors on the road seeking the capital, and they believe that they’ll have a pretty good chance of getting it someday?

Pardee: So in my belief, they’re rational. There is capital. Capital is available. It’s a little bit more discerning in terms of which decisions people are ready to make today than it was maybe in say, the summer of last year or the spring. But there’s money out there. The question mark really is going to be who gets the capital. And I do think that there is always, and certainly in this environment, a haves and haves not outcomes that’s out there for people as well.

Candrilli: It’s, like you said, record breaking. More and more managers just keep coming to market. But like I said before, LPs are all chasing the same managers.

Pardee: I would also wind back time and say two years ago you could almost invert those two categories and the opposite one was doing well in the marketplace. So first-­‐time funds were very much en vogue in 2012, ’13 and ’14. Very much not so in ’15 and ’16; the established managers we were just talking about have become the belles of the ball. And we’ve had fundraisings in each environment with the same manager where in one case, it was a slow process two-­‐and-­‐a-­‐half years ago, and we have a three-­‐ month  fundraising    almost  one  and  done    that  took  place between

October and January of this year that blew through the cover and to its hard cap having to raise the hard cap.

Snow: Let’s talk about the phenomenon of so many funds in the market from the LPs  perspective.  How  do  these  often  under-­‐resourced  investors  just process the sheer volume of PPMs that are sent their way, and placement agents that are knocking on their door? It must be challenging.

Pardee: Definitely. I mean, clearly in each LPs shop they have a small staff. Smaller than the market itself would suggest if they wanted to review everything. So no one can actually see all of the funds that come across their door. So they have to make decisions. In many cases, they’re proactive about choosing which managers they think – from their own research of the marketplace, using Preqin is a part of that I’m sure – that they want to spend time on going forward. And then as the inbounds come, they pay attention to the ones that meet certain thresholds of criteria that they have for interest. Maybe it’s track record related, maybe it’s sector specific, maybe it’s geography. They, of course, will have people that they’re willing to listen to more than others in terms of general partners they may have met with in the past, or placement agents that they’re familiar with over the course of time, or a combination of the two. So everyone has some vetting mechanism that they have so they can filter down what it is they’re really going to spend their time on, given the absolute volume that’s out there presently.

Snow: Courtney, do you detect a level of anxiety out there among GPs that are raising capital that it’s just too crowded, and they might not get where they need to get?

Candrilli: In terms of GPs raising capital, I think it absolutely depends on the fund. Some we’re seeing close in one to six months. Some we’re seeing taking longer than 36 months.

Snow: Okay, next topic – those who close, close fast. As we can see as recently as 2013, the average time it took your average private equity fund to reach a final close was nearing two years. Now it looks like the average time is actually about 11 months, or we could say the average time is actually even roughly a year. Talk a bit about how Preqin captures that information, Courtney, and what does it mean for there to be such a drop in the amount of time it takes to close a fund.

Snow: So Courtney, talk about what it means for the average time it takes to close a fund to compress basically from just a couple of years ago. What’s changed in the market, and why are the numbers different?

Candrilli: We track the amount of time it takes managers on the road to achieve interim closes and their final close. So some of the things we’re seeing is the established managers that have historically performed well, first quartile even sometimes second, are closing rather quickly with a lot of re-­‐ups. And then on the other side, it takes a little longer because they have to get their name out there, their brand out there, establish themselves to these LPs and give them a reason to be investing in returns they might not know how those funds have done historically. So that would probably be why we’re skewing towards the established managers, because a lot of those are closing very quickly cause of the record level of capital sitting with investors.

Pardee: Thank  goodness  that  it’s  not  only  the  few  at  the  top  that are closing quickly, that there are others that are closing and had longer periods as well. But when we’re at the bottom of the global financial crisis, and if I were sitting with a general partner planning to go on the road, I would have told them to plan for 18 months to forever. And that’s roughly what the Preqin data show in that time window.

Today, I start out by saying it’s probably a 12-­‐month process, and that’s about what has just shown for the past year. And the why has everything to do with the capital that’s available and the fact that generally speaking, returns are better than they were a few years back. If you have an established team, a good track record and a good history of being able to deploy capital, those funds will go in a certain amount of speed. But exactly right on what Courtney, you were just describing, a first-­‐time fund might as well fit into my 18 months to forever category right now. It is hard to be the new strategy right now.

Snow: I   mean   Courtney,   raising   a   fund   in   three   or   four   months is just astonishing, right? I mean, that’s not even raising a fund. That’s just order taking, right?

Candrilli: Yeah,  and  that’s  like  I  said,  why  we’re  seeing  across  the  board just a variety of different time frames. But for the most part, if it is a good fund with good performance, we are seeing it close quicker than we have historically.

Snow: So at what point do you just abandon your fundraise? At what point do you realize it’s taking too long, there’s not enough takers, maybe you could lower your target? I mean what advice would you give to someone who’s reaching that two year time horizon and not feeling very good about the fundraising effort?

Pardee: So there’s no deadline on fundraising. People who are in the    market, are in the market. And for any general partners in the market, it’s the most

important thing they’re doing in any given year, or two years, if it’s going to take as long as that. So there’s no right answer to that question other than you’re trying not to end up there. The answer really has to do with how do you get the several LPs who are paying attention to become your first closer, if that’s what the issue is. Or if you’ve had a first close, to aggregate the additional limited partners to be your second or third closer. And sometimes it’s a brick by brick building process until you’ve got something that’s standing strong enough to feel like a good outcome.

Snow: Courtney, does your firm track how many fundraisings are abandoned?

Candrilli: We don’t track abandoned, but we do track that usually after 36 month, firms will close up shop.

Snow: They kind of go away, right, yeah.

Candrilli: Yeah.

Pardee: At some level, one has to have the takeaway that it’s an attractive market. Coming into this market is a good time to be raising money. If your strategy is strong and your performance is strong and your team has been together for a good while, those funds are getting raised. They might take three months. They might take a year. Maybe it’s a little longer, but if a strategy holds in terms of what the future is looking like, then the market is open for them.

Snow: Okay, now it’s time for a highlight from our special guest interview.

Mike Ricciardi, Mercury Capital Advisors:

Hi, I’m Mike Ricciardi. I’m managing partner and founder of Mercury Capital Advisors. And I’m here today with Mike Fascitelli, founder and chief executive officer of the Imperial Companies. Welcome, Mike.

Mike Fascitelli, Imperial Companies:

Thanks, Rico.

Ricciardi: In particular, are there any indicators that you look for in the economy in general when you and the Imperial Companies contemplate making an investment?

Fascitelli: Sure. We always look to – obviously one of our biggest impacts in real estate is job creation. If you think about jobs and residential and retail, it’s incomes, it’s jobs and economic growth obviously is a key to that. So we look at that. And obviously we’re not economists, but we try to understand that and what that might be. We look at the downside, but if it doesn’t come the way we think it should and we measure that in terms of

what the growth in rents might be because in our business, it’s all about getting an increase in cash flow and that’s mainly through the rents going up.

But it’s a – I think what’s happened in the world, Mike, is that it’s very… It’s not only again an absolute game, it’s a relative game. The US hasn’t been high growth but compared to a lot of the other countries around the world, people think it’s got a better risk-­‐adjusted growth rate than most other places.

Snow: Okay, that’s all for our program. Thank you to Courtney from  Preqin, and Alan from Mercury, for being part of Fundraising Roundup…

Pardee: Thank you.

Snow: …and we’ll see you next time. Thank you for watching.

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