Private equity confidence on the up?

18 months ago M&A was all but non-existent and private equity houses were in the doldrums. When Investec Fund Finance surveyed UK-based general partners (GPs) in August 2009 for its inaugural Private Equity Barometer, 11% of respondents said they would not raise another fund; just over a third planned to raise more than their previous fund. Nearly half felt that the economy would remain sluggish into the foreseeable future. For the senior management teams at most private equity houses the primary concern was dealing with struggling portfolio companies rather than raising funds and making new investments.
 
But has sentiment now swung the other way? Investec’s latest Barometer now shows that only 3% of those who responded do not expect to raise another fund and those planning to raise more than their previous fund has increased to over 40%. Of these, 85% expect to raise at least 20% more. In addition over 40% expect the economy to improve over the next year. In both the upper and mid-market levels, there is evidence that the situation is indeed improving. BC Partners recently reached close on its ninth fund at €4 billion, albeit a number of concessions had to be made to investors, including an early-bird discount on management fees and carried interest. 

However, despite some traces of optimism, over 70% of respondents believe that the fundraising environment is still poor. This is hardly surprising given that the US$225 billion raised globally in 2010 was the lowest since 2004. In addition, according to the Centre of Management Buyout & Private Equity Research (CMBOR), the overall value of European buyouts fell by more than two fifths in the first quarter of 2011 to just €11.7 billion, with €3.9 billion of these being UK-based.

Interesting future

Laurence Whitehead, corporate finance principal, comments: “Strategy will be the key to private equity houses being able to raise funds in the foreseeable future.  Those in the mid-market with an operational focus will more likely appeal to Limited Partners (LPs). This was not the case in the past but it would be fair to say that currently there is high demand from LPs for the mid-market. Two good examples of this are Inflexion Private Equity and HgCapital, who both raised significant funds in 2010. However, competition is tough in this space, with most LPs interested in reducing their number of GP relationships by only dealing with those who can demonstrate top quartile performance. A proven track record is therefore a must.  It seems to be clear that whilst good funds will raise monies quickly, others may be left behind. The next few months will be interesting, to say the least, because the disparity between funds that have performed well and those that have not is larger than was historically the case.”

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To find out more about how we can help your business to raise private equity funding, contact our award-winning corporate finance team for a no-obligation, initial discussion or email: mhcfinfo@mhllp.co.uk