March 18, 2013
Interviewed by: David Snow
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Rise of the LP “Influencers”

The re-up rate for follow-on funds is now averaging 50%, posing a serious challenges for GPs hitting the fundraising trail. The best strategy for fundraising success in this environment? According to three experts from BlackRock, Pantheon, and MVision, it’s to make sure to influence the influencers–the LPs whose commitments are closely watched by other LPs. In the fifth segment in Privcap’s popular “New Rules of Private Equity Fundrasing” series, our experts discuss the importance of gatekeepers in today’s market and the 20-odd LPs that really matter in a large fundraising.

The re-up rate for follow-on funds is now averaging 50%, posing a serious challenges for GPs hitting the fundraising trail. The best strategy for fundraising success in this environment? According to three experts from BlackRock, Pantheon, and MVision, it’s to make sure to influence the influencers–the LPs whose commitments are closely watched by other LPs. In the fifth segment in Privcap’s popular “New Rules of Private Equity Fundrasing” series, our experts discuss the importance of gatekeepers in today’s market and the 20-odd LPs that really matter in a large fundraising.

David Snow, Privcap: Today we’re joined by John Greenwood of Pantheon Ventures, Mounir Guen of MVision Private Equity Advisers, and Russ Steenberg of BlackRock Private Equity Partners.

We’re talking about new rules in the private equity fundraising market. And now it’s time for rule number five, which is the influencers are more influential than ever. LPs that might invest in your fund now have very substantial influence over the other of LPs that might invest in your fund. So it’s very important to make sure that the influencers like you. Moose, what do you advise your clients as far as winning over the most important LPs? And who are they in today’s market?

Mounir Guen, MVision: There’s a couple different ways of cutting the process or the question. The first is, how big of a fund are you raising? The next question is, what is your re-up rate. Because one of things we didn’t touch on is the concept of mortality and melt. So if I had 40 investors, mortality’s how many will come back in headcount?

The melt is how much money I get from my existings, relative to what I had last time. And that can be done on an investor-by-investor basis. So you were 50 last time. You’re 30 this time. Or it can be done in aggregate basis. And that then kind of sets the scene for where the influence will be.

And if the mortality could potentially be high, I’ve got to ensure that those names that are my key investors that do come back come back for better numbers, so I can compensate for those that aren’t coming back. And if those that are not coming back are not coming back because their programs change or their CIO changed, that’s fine. But if they actually made a decision not to go to with me because they went with somebody else, then I need to be able to balance that.

If my re-up rate is good and my melt is not too high, if not really there, then I look at the new capital that I need to bring it. Now, with the new capital, there are a couple of different ways of approaching this. The first is the traditional way. Let me go meet 300 people and see who sticks. And that’s not advisable, because that can also lead to an unpleasant situation. Because if they have issues with you, that can proliferate.

Alternatively, you can target a couple of key investors that either in and of themselves can amplify or magnify your fund rates. And within that context, one group of investors that have had a lot of influence in the recent year or two is gatekeepers. Because the gatekeepers, not only do they represent some important capital that could be an existing investor, but they’re are also winning capital in new areas in Asia and the Middle East, in Europe, and which means then it’s important that one understands how they process, who they are, how they operate, and work with them closely in what they need to have done within their processes of evaluating for their clients.

Now, you have to remember the hard thing with a gatekeeper is you can’t sell a gatekeeper. Because a gatekeeper structures a portfolio and executes the portfolio that they believe are best for their clients.

Snow: They decide what they want first and then go get it.

Guen: And then they see the choices they have. So it’s a top-down process, which was different to the days that Russ mentioned when he was running AT&T, where it was him and a couple of investment professionals, where we could go and have a debate and discussion and a dialogue with him, and we could sell Russ.

Russell Steenberg, BlackRock: I was easy. I was easy.

Snow: Let’s pause and define very briefly what do you mean by gatekeeper. And are there any in this room?

Guen: Well, I think that in the case of both Russ and John, their firms are reflecting on how they want to be positioned as they develop. And so concepts of separate accounts, concept of advisory businesses, they both can very easily touch on that gatekept concept.

And so what you had historically is you had the pure fund of fund, which you were fully discretionary, which was capital given by pension plans and life insurance companies and others. And then you had those that would not have discretionary capabilities, but would advise the programs on best return profiles. And in today’s marketplace, there is a number of names of which the two are pretty much in between.

Steenberg: Because you have consultants who come into the game in a big way now, too.

Snow: So the definition has become much broader

Guen: That’s correct.

Snow: Russ, what are your thoughts about the rising influence of key investors in the market and the degree to which they have influence over other investors?

Steenberg: There always have been lead horses in the marketplace that people look to. And there’s been an evolution to that. In the ’80s and early ’90s, it was probably the corporate pension funds in the United States. In the mid ’90s, you had the public pension funds in the US and Europe start to come into the market relative to capital. And of course, now you’ve had sovereign wealth funds. And I understand, Mounir, the new wave coming in, the Chinese insurance companies.

Guen: Well, no. Actually, it’s back to the US public, to be very honest.

Steenberg: Well, US publics are also going much longer in their private equity portfolios as they’re looking for returns, as the expectations in the public markets are so slim going forward. We’re starting to see a lot of that as well.

So there’s always been your leading investors. In the US publics, there’s a list of seven or eight. And there’s the Canadian firms that are a list of six or seven that you would look to as being big, big checks, and would be very important to your fund raised to be able to demonstrate to the rest of the limited partner community that you have the credibility, and these folks are willing to write very large checks for you. So that’s still very, very much in play.


Guen: But you see, the thing you’ve got to look at, David, is that if you’re a $3.5 billion plus fund, you need to have– I told you earlier, there’s 20 of them that have substance that can write large tickets. And they are quite geographically diversified. So the question that we then have is for that fund, how many of those can you get? Because any gap that you have, if you’re trying to raise an $8 billion fund, you’ll have to go to lots of little names.

If, however, we’re going down to a $1.5 billion fund, we get two of the 20. . .  It completely changes the demography. Alternatively, if we get a couple of gatekeepers who view this as a good fit for their broad client base, and they then come [? back ?] in with a dozen of their clients that want to have allocation to that particular strategy, again the fund is done well. And so, the funds between $500 million and $1.5 billion have a very different dynamic.

And you can have exceptions whether they’re first-time funds or established funds, assuming that they tick the boxes correctly, and they meet a certain need that you have. Just so you know, the average re-up rate is 50% at the moment, which is quite hard work.

Steenberg: It’s done down quite a bit.

Snow: If you’re in a fund and you’re looking at your next fund, you have to assume that half of your– This is 50% of capital or 50% of the LP names?

Guen: The capital.

Steenberg: Everything Mounir just talked about is known as managing your limited partner base. And you manage your limited partner base just as you manage a portfolio of companies, exactly the same way.

Guen: The one thing that we encourage general partners, to Russ’s point– because I think he’s spot on– is please, make sure that your investors know you. And to the extent that they have a gatekeeper or switch gatekeepers, make sure that those people know you. Because they keep logs. And even though you might have a different person processing you at the time that you fundraise, you keep the notes.

And you can’t take them lightly. And so the materials that you have representing your firm outside the fundraise absolutely must be spotless. And the messages have got to be repeated clearly. This is our strategy. This is our process. These are our mandates. This is our pipeline. This is the most recent deal we’ve done. This is a problem investment. This is a good investment. And that record has to be facilitated consistently into the investors.

So we actually move on the side of advising general partners to visit their existings every quarter. So once a quarter, you’ve got–

Steenberg: You probably have tier there. There’s a certain group you want every quarter. There’s a certain group you’re probably doing twice a year. . . One of the things Mounir is talking about, which I think is very important and shouldn’t be overlooked, because it has dominated most of this conversation, the private equity world is more complex and is evolved and is more professional today than it ever has been. And as a result, the GP model, as we’ve been talking about it here, has also evolved and has had to evolve to meet the complexities of the current world that we’re in.


And where you’re seeing it the most is on the transparency and the communication and in dealing with a limited partner base. Because if you look at the GP’s constituencies, the limited partner being the capital base, in the old days it was, give me the money and go away for 10 years. I’ll just send it all back to you. And those days are long, long gone, because you have to stay right on top with this constituency group so that you can maintain that re-up rate and the things that Mounir is talking about.

So as a result, in the general partnership itself, there is a greater emphasis, or there should be a greater emphasis, on having the resources within the GP group that can do all the kinds of things that Mounir is talking about. Because if you don’t have that, you will be behind the eight ball of the general partner groups that do have those resources.

Guen: That’s right. And I think from an IR perspective, it’s very important that the investors see the investment professionals. And you don’t not put them on the road. So the senior member of the firm has the most important IR job, because they are the image of the firm, and they need to go and understand their fund capital.

The IR people need to make sure that these people are properly briefed and there are no issues with any of the existing investors. And so if there’s questions or there’s some question that somebody had about something that was done, it’s dealt with very quickly. So the support system for the transparency and the communication is absolutely crucial.

Steenberg: If it’s done right within the GP firm, your IR people will not be second-class citizens. They will be on par with the investment professionals. And they need to know as much about the portfolio as the investment professionals do, which means in all the processes and in all of the internal meetings, they need to be involved so that they can sit down in front of us and talk in an articulate way about their portfolio and represent their firm.

Guen: And then when you launch for the fundraise, you take those very skilled IR professionals, support IR professionals for all the questions that will be raised, and introduce one partner who will then spend the bulk of their time with the fundraise and let the others go and all run their portfolio companies.

Snow: John, can you talk about the dynamic among limited partners as they sort of talk to each other about GPs and sort of influence each other? How does that work? And how has it changed now that LPs are much more prominent and the pendulum has swung their way?

John Greenwood, Pantheon Ventures: We’ve talked a lot today about how general partners have needed to become more sophisticated in their processes and in building their businesses. And I think we’re seeing the exact same thing on LP side. I think LPs are much more thoughtful about how they construct their portfolios, much more thoughtful about what sort of diversification they want to achieve, and how they want to achieve it.

And generally, I think that that’s leading to a lot of the things that both Mounir and Russ have talked about in terms of the attrition in your LP base. As GPs are coming back to market, a lot of the LPs are pruning their portfolios, making other strategic decisions about how they’re going to get access to these type of assets, and aren’t necessarily automatically re-upping in every fund that they’ve been in in the past.


Snow: So they’re saying, we’ve finally done all the homework that we’ve needed to do on your fund, and actually, we don’t want to be next fund anymore, unfortunately.

Greenwood: Listen, I think that’s happening. And that’s obviously difficult, but as LPs pare back their portfolio, clearly, they have to deliver that message. I think, ideally, that message gets delivered sometime before the person’s– the last day of their fundraise or looking for that lead order that they were expected to come from that LP.

Steenberg: Coming back to your point about limited partners talking to one another, annual meetings, advisory board, and special sessions of limited partners are a wonderful opportunity and have been used for years by the limited partners to establish and maintain their own limited partner networks. Because that’s when you see your brethren across the world. And it’s out of those networks that everybody talks to one another.

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’s 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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