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Private equity fundraising fragmented as LP requirements evolve

Private equity fundraising has become fragmented as limited partners look at more than just performance when selecting their managers, delegates at the British Private Equity and Venture Capital Association Summit in London heard.

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(L-R) Mirja Lehmler-Brown, Hayfin; Yalin Karadogan, Cinven; Alex Scott, Pantheon; Elizabeth Weindruch, Barings; and moderator Alexander Chester, Clifford Chance.

Source: BVCA

Speaking during a panel discussion at the conference Oct. 10, Yalin Karadogan, partner in Cinven Ltd.'s investor relations and fundraising team, said demand for large cap European funds has been high, and many have held first and final closes in record time. The private equity investor, which focuses on building European and global companies, closed its oversubscribed seventh fund in May, having reached its €10 billion hard cap in less than four months.

But this has not always been the fundraising experience, Karadogan added, and the cycle is expected to turn at some point in the future. For that reason, there is no room in the market for arrogance or complacency, he said.

Investors need to deploy large amounts of capital, Alex Scott, a partner in the European investment team at fund of funds and adviser Pantheon Ventures (UK) LLP, said.

"It does lead to the situation where in some ways it's easier to raise a [£]3 billion fund over [£]300 million fund in the current market," Scott said. He added that LPs base their decisions on a range of factors, with performance being important but not the only consideration.

In the middle market, some funds struggle to reach their targets because of LPs' varying requirements, Scott said.

It comes down to can I raise money, and the GP’s answer is obviously going to be very, very specific - you move away from generality very, very quickly. The question is almost aimed at how the war is going, well it's actually a series of mini battles [for LP commitments] and it does mean that the market is actually very fragmented," he said.

The investors on the panel said one of their requirements when choosing a general partner, or GP, is that their managers become long term partners alongside which they can invest for the next 10-plus years.

"It really does come down to, are you sitting across the table from somebody that you trust and somebody that you can partner with for a long time," Elizabeth Weindruch, managing director at Barings LLC Alternative Investments, an LP focused on private equity and real asset funds, said. "At the end of the day, it doesn't matter where the power is but is that partnership dynamic there and is it real."

The LPs also pointed to emerging trends that have captured their interest. Multi-strategy approaches, where private equity firms raise funds alongside their flagship buyout funds targeting different strategies, have advantages for both GPs and LPs, Scott said. LPs have to find ways to commit their capital, and forming a new relationship comes with risk. Investing in a different strategy with a manager an LP already knows can eliminate some of that.

A number of seasoned private equity professionals are spinning out of established firms to raise a first-time fund. Although LPs don't get a "pretty track record" and a "nice basket of cash flows," which can mean more work, Weindruch believes this is where the next generation of talent is. "We want to find the next Cinvens of this world that are out there and are going to be generating long term returns."

Mirja Lehmler-Brown, managing director in the private equity funds investment team at Hayfin Capital Management LLP, said her firm has made a number of investments with emerging managers, where they can form a relationship and pass on their experience. "We are very happy to be in new, thematic funds; in more funds that have got sustainability; in funds that are new entrepreneurs into the arena; because we are laying the language and there's a strong connection in partnership that we can really set out," she said.