Private equity firms around the world are adapting to a “new fundraising road map”, according to the 2013 Global Private Equity Report, released by Grant Thornton.
Now in its third year, the report is the result of 156 in-depth interviews with senior private equity practitioners around the globe.
Dennis McGurgan, Senior Partner at Grant Thornton Isle of Man, said the report identified ways the Manx economy could benefit, including the challenge of increasing regulation in other jurisdictions.
He added: “With the number of Isle of Man domiciled private equity funds increasing, and the Isle of Man Specialist Fund category having been introduced in 2010 to target the private equity sector, the 2013/14 Grant Thornton Global Private Equity Report will make interesting reading for local fund managers and those investing in that sector.
“Among other matters, the report highlights that the ever increasing burden of regulation elsewhere in the world has the potential to harm activity in the sector, which is something that Isle of Man operators in the sector might be able to capitalize on, given that there is no need for pre-approval from the Isle of Man Financial Supervision Commission for Specialist Funds meaning that such funds can be set up very quickly and there are also no regulatory restrictions on asset class or trading.”
The report provides insight into private equity general partners’ (GPs) expectations for numerous aspects of the fundraising and investment cycle. This year the report takes a closer look at fundraising and reveals how private equity firms are adapting their approach to increase their chances of a successful fundraise.
While the private equity fundraising environment around the world is still seen as challenging, there has been a marked improvement in sentiment across all geographies since last year’s report, with more than half of the executives surveyed (54 percent) having either a positive or neutral outlook. This compares with just a quarter (27 percent) last year.
“There is a brighter view of the fundraising environment across nearly all the major private equity markets in the world. The percentage of respondents describing the environment as positive is up in North America, Asia Pacific, Middle East & North Africa and even Europe,” Mr McGurgan explained.
While there is more general positivity around fundraising prospects, there is also a recognition among the survey respondents that the process has become costlier and more onerous. Many report that the distinction between “fundraising” and “investor relations” had become more blurred and fundraising is seen more as a constant process of relationship building and reporting rather than a cyclical exercise.
The 2013 Global Private Equity Report adds: “Momentum is widely understood as a prerequisite for successful fundraising. An early first close on a good proportion of the target is often seen as key to how the process is perceived and, therefore, whether other limited partners (LPs) will feel confident enough to come on board. Much of the drive for momentum is rooted in extended LP pre-qualification and pre-marketing phases, as well as ensuring likely information requirements are prepared for ahead of the ‘official’ launch.”
As well as ensuring they are fully prepared for the official launch of their fundraising, GPs are considering alternative incentives to attract new investors. Co-investment opportunities are the most commonly cited strategy, as the report explains “with the power shifted to the LP, GPs are reconciled to accepting new demands or offering incentives and concessions (fee discounts, advisory board seats, co-investment rights, etc), encouraging LPs to commit, especially ahead of the important first close”.
When asked to compare their most recent fundraise with previous experiences, private equity firms most commonly cited the amount of due diligence by prospective LPs as an area where the process had changed. The time it takes to push investors over the line and the sheer number of LP meetings, were also areas where changes were noted. Across the world, 65 percent of private equity firms expect to be on the fundraising trail within the next 12 months. More firms than ever (22 percent) expect their funds to be dominated by new LP relationships.
By far and away the most common “pressure point” in the GP-LP relationship is the question of distributions and exits, with 23 percent of respondents citing this as being the area of most LP pressure. This is followed by the firm’s strategy in light of market conditions (13 percent), fees (12 percent) and ESG policy (12 percent).
In light of the pressure for exits, it is perhaps unsurprising that the majority of GPs (51 percent) predict there will be an increase in dividend recapitalization activity over the next 12 months. Only 2 percent expect there to be a decrease and 47 percent expect activity levels to stay the same. The bullishness was most pronounced in North America, where 64 percent of GPs are expecting an increase.
As well as assessing the market for private equity fundraising, the Global Private Equity Report delivers an in-depth examination of prospects for deal flow, access to debt finance, exit activity and portfolio company performance drivers.
The report concludes: “While the results from our third annual global private equity survey indicate that the numerous challenges facing the industry remain, there appear to be signs of growing optimism amongst respondents, suggesting that perhaps we are at the dawn of a new phase of increased activity, especially in the core private equity markets of North America and Western Europe.
“With the continuing improvement in debt markets in North America and the potential follow on impact this may have globally, as well as signs of positive economic news from Europe and sustained high growth rates across the Asia Pacific region, there appears to be supporting evidence underpinning these early signs of returning confidence.”
