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Bain: Global private equity report 2010

June 22, 2010 Leave a comment

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Front cover of Bain report

Will Bain&Co's report prove accurate?

Bain & Company: “Global private equity report 2010” Bain briefs Publications.

I’ll provide some commentary when I get a chance to read it thoroughly. At first glance it looks very nicely laid out and is quite inviting for the reader, even if the corporate black and red is a little reminiscent of a casino table.

Leafing through it brings to mind the hilarious knockabout farce that was BCG and IESE’s 2008 offering The Advantage of Persistence: How the Best Private Equity Firms “Beat the Fade”, which you can read here.

It’s full of chioce tidbits that will leave you with aching sides and coffee on your monitor screen. AND it was co-authored by Heiko Meerkat.

But for those of you with a shorter attention span, how abut a quick look back to what McKinsey had to say about the buyout boom in 2007:

The recent tightening of credit markets has complicated the financing of some buyout deals and may dampen the flow of investor money into private equity firms. Skeptics on both sides of the Atlantic have been quick to proclaim that the private equity boom is over. But don’t expect private equity to suddenly fade to the background, as did the leveraged buyout boom of the 1980s. Even if growth slows in the short term, pension funds and other institutional investors will remain interested in private equity. McKinsey projects the industry’s assets under management may double by 2012, to $1.4 trillion.

Wow. AND “wow” again.

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LPs: More GPs than ever will struggle to raise a fund over the next TWO years

June 14, 2010 1 comment

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LPs predict fundraising will be very tough for 24 months

LPs don't expect fundraising to get easier anytime soon

Two years of winter:/
That’s what awaits those who did/
Not bury their nuts

We all know that times are tough for GPs out fundraising at the moment. But ask anyone on the sell-side and they’ll tell you the same thing:

2009 was horrible, but we expect things to pick up by the end of the year

A quick poll conducted by IE Consulting last month, however, suggests that times will remain tough for those PE houses out scavenging for LP commitments. Of course, the very best funds will come out and raise money. By the way, “very best funds” does not mean “top quartile” (anyone ever marketed a fund that wasn’t top quartile?). “Very best funds” means just that: those private equity and venture capital funds that have consistently delivered performance that outpaces its peers and other funds in other asset classes.

It’s simply no longer enough to be delivering better returns than other European buyout funds or other US venture funds. Limited Partners are taking a hard look at the dollars they are investing in private equity and VC funds and how the returns stack up against their other investment strategies: Commentators should not be surprised to see even committed investors into the asset class “taking stock” for a good while longer than even the most pessimistic might have expected.

So what does this mean for those in the market now, trying to raise a fund?

  • Get out early. You could be in the market for 18 months or more
  • Be flexible. Respect the fact that the balance of power now rests with your LPs: They have alternatives.
  • Show how you are different. A longer fundraising timetable means more “competing” funds on the road at the same time. Why should LPs invest in your fund?
  • Don’t forget to make the case for private equity: Is your strategy preferable to investing in the public market? How?

I remember a conversation I had in 2008 with the head of investor relations at one of the preeminent large buyout houses. After exchanging niceties and discussing the industry landscape, talk turned to their current fundraising activity. Apparently, the firm was engaged in “philosophical” discussions as to whether it should even include a market commentary section in its PPM. After all:

“everyone knows what we do and why they should be investing in our funds”

Oh, how things have changed…

You can read the full research summary from our LP poll here:

LPs in a new era: The Good, the Bad and the Ugly

Life as a Limited Partner during the financial crisis – The Good, the Bad and the Ugly

May 18, 2010 3 comments

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LPs demand better communication

GPs with poor communication are losing out

Earlier this month I had the honour and pleasure to be invited onto a panel at the 6th Annual Private Equity Forum at my alma mater. The panel sought to address how LPs had been affected by the financial crisis and, not being a Limited Partner myself, I thought it prudent to ask some, beforehand. If you were one of the 60 institutional investors into private equity that responded to my questionnaire, many thanks!

In any case, and as my colleagues predicted, there was no real need to call upon the research findings during the event. But some of the findings were so intriguing that I wanted to share them with you. I hope you find them as interesting as I did.

The link below will take you to a summary of the results.

Limited Partners in a New Era – the Good, the Bad, the Ugly

People prefer performance, and that will never change, but we found that many LPs had already ditched managers that they felt had not been communicating with them sufficiently well and some found that misalignment of interests between LP and GP (shock! horror! such DO exist!) had become more apparent during the crisis.

There’s much, much more in the full report, so I hope you will take the time to dive in. If you have any questions or comments, you know where to find me!

Open, for business… Private equity firms and transparency

April 21, 2010 3 comments

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As promised, I’ve uploaded a pdf of the first article on IE Consulting’s new research into the way that GPs are communicating and how open they are to inbound communication. You can access it below:

This first installment looks at some of the absolute basics of open communication: How easy is it for an interested party (press, Limited Partner, intermediary, etc) to find contact details for individuals within the firm.
Sorry I couldn’t get it to embed properly!
“Open, for business?” full article on docstoc.com
The next piece in Private Equity Europe will lok at the thematic content of prtess releases from buyout investors in Europe since January 2006. And there will be more in the coming weeks, so watch this space…

Waste not, want not

March 8, 2010 Leave a comment
Biifa waste bins Electricinca, Flickr

How solid is it /
Selling gas to get liquid? /
Don’t get in a state!

Biffa is supposedly trying to transform into a company that turns waste into energy, so why sell a division that does just that? Maybe LPs need distributions…not that distributing money to LPs is necessarily a bad thing, of course!

The story at AltAssets

Of course, landfill gas collection is only a viable business as long as there are landfills producing gas. Given that landfills are increasingly unpopular with government and the general public and that collection of gas is only really viable for 20 years or so from each site, this is a pretty smart way to return some cash to invetors with out too adversely affecting the resale price of the business.

Do LPs buy funds the same way we buy (or try to buy) TVs?

July 20, 2009 10 comments

How LPs select funds

How LPs select funds

Laid low at home earlier this week, suffering from a thankfully improving bout of self-inflicted food poisoning, I found myself wondering about the thought processes that are involved in an LP making a commitment to a new fund.

In an earlier post, I mentioned the three arguments that I believe are central to any successful fundraising process. If these arguments are sufficiently strong, the fundraising process should run relatively smoothly. A fundraiser must always establish the following:

  1. This market represents a great opportunity, right now and for a considerable time;
  2. This strategy is the most suited to exploiting that opportunity;
  3. This manager is the most able to successfully execute that strategy.

I may have given the impression that I believed that this was all that was necessary to secure an investment, but of course that is not true.

The fund selection process is more sophisticated and the biggest challenge for any fund (but particularly a new fund) is going to be convincing an LP that the time required to properly investigate the fund would be worthwhile.

It is all very well lining up watertight arguments and detailed corroboration, but what good is that if an LP doesn’t get past slide five in your pitch book or doesn’t pick up the PPM?

Not much good at all, of course. Stating the rational case for investment is probably only going to pay dividends once the emotional curiosity of an LP has been awakened.

I think it has a lot to do with awakening fascination, emotional curisosity in the investment opportunity, the investment strategy, or the management team.

You see, as much as the scrutiny of due diligence may reveal about the historical performance of an opportunity, a strategy and a manager, it cannot foretell the future. As everyone in the investment business knows:

Past performance is no guarantee of future results

In order to evaluate the likely future performance of a fund, an LP cannot rely on numbers alone. When an analyst is picking through 50 PPMs, which are the ones that are going to get the most attention and stand an improved chance of being presented to the investment committee? The fascinating ones, of course!

Now, an analyst that values his or her job is not going to present this as a selection criterion. Imagine the response to this statement:

I think we should invest; I’ve always admired Bono and his engagement with imprtant issues. We can trust him with our money,

In all likelihood this fascination with the fund will be rationalised into a more empirical analysis of the benefits of investment. In fact, as the selection process becomes more abstracted from the initial contact with the brand and due diligence begins in earnest, the emotional impact of the brand actually becomes less important.

We select the funds we want to invest in emotionally and assess whether we can invest in them rather more rationally.

I’ve set out how I view this process in a diagram, below:

How LPs select funds

How LPs select funds

In essence, the idea is that most investment opportunities progress by awakening an emotional interest that is then rationalised, before being checked against certain other criteria, including competing investment opportunities. The amount of time that passes between the individual steps can vary between simultaneity and years.

  1. The LP becomes aware of the fund somehow
  2. The LP has some manner of contact with the fund or a fund representative
  3. The LP finds one or more elements of the opportunity, strategy or manager sufficiently fascinating to properly engage with the fund, its materials, or representative
  4. The emotional interest in the fund is rationalised into a more empirical investment case
  5. The LP conducts Due Diligence on the fund
  6. The LP evaluates the fund against those that are perceived to be similar
  7. The LP selects the fund for investment and makes a reccommendation to the board

That’s kind of how I would probably buy a new TV…

  1. Matt hears about the flatscreen TV
  2. Matt sees a commercial about the TV
  3. Matt thinks that the TV would look cool on the living room wall. It’s so shiny!
  4. Matt decides that buying the TV and fixing it on the wall would mean that he could get rid of the old CRT TV and the ugly TV stand…that would mean space for an extra chair in the living room and a more comfortable time when friends come over – how practical!
  5. Matt checks out to see if the TV will be easy to mount on the wall and if it has a digital tuner built in
  6. Matt checks out other, similar TVs
  7. Matt tells Mrs C-G that family C-G simply must invest in this practical, space-saving, TV

Typically, my investment recommendation will be rejected by the committee (Mrs C-G) at this stage. 😦

Does Private Equity “get” social media?

July 16, 2009 12 comments

I’m not talking about venture capital, because those guys definitely get it (well many of them, at least). I’m talking about small buyout houses, mid-market buyout houses and upwards.

1. Fundraising
In markets where LPs and consultants are overloaded with information on new funds coming to market, one would think that a new channel of communication (this is all social media, collectively, are) would be pounced on. And it is free. Have you seen anyone outside of the venture space really doing anything interesting?

2. Deal origination
Particularly in a time when operational expertise is prized over financial engineering, one might expect that a medium perfectly suited to the demonstration of expertise would be a key weapon in the arsenal of any deal origination team. I was fortunate to speak with David Teten on this topic recently and he definitely gets this, too. There is so much that COULD BE done. And so little BEING done. The first team that grasps this and runs with it is going to steal a considerable march on the competition.

I think I am going to give a little more thought to this topic and I ‘d be interested in anyone else’s views.