Brad Briner on Fundraising: “The Problem is Not the LPs, It’s the GPs”

Brad Briner is a Managing Director at Morgan Creek Capital Management, a fund-of-funds manager based in Chapel Hill. Today I chatted with him in preparation for our upcoming panel at Buyouts South. I wanted to share some of his comments on the fundraising market, including what emerging managers need to get their fund raised, why some funds are oversubscribed while others fail and which types of investors will be active this year.

What’s the biggest trend going on in the fundraising market today?

We’ve seen the re-inauguration of the oversubscribed fund. The success of a handful of funds closing oversubscribed suggests that there remains an appetite for private investment strategies. It also shows that the problem is not the LPs, it’s the GPs. By that I mean, there are so few GPs out there that have (1) an institutional track record, (2) haven’t shot themselves in the foot in some way in the last year, (3) are raising a reasonable amount of capital, and (4) have momentum after a first close. If you have all of those things, you will see oversubscription. When I first saw it I was stunned, but it makes sense now. But lets be clear, LPs are hiding behind the fact that they claim to have no money to invest.

Are you guys hiding behind that fact too?

We’re not. We’ve had some difficult conversations with some people who have not wanted to admit it was coming. But we’ve tried to be very disciplined in allocating capital in every quarter of 2009.

By “difficult conversations” do you mean you’ve ended relationships where you’ve always re-upped in the past but now you’re not?

Yes. The way we think of this is, each and every fund we invest with stands on its own. We don’t do relationship investing, and we don’t care if we have an existing relationship or not. That has kept us out of a lot of trouble. Many LPs out there who just back the same sponsor each time have found out that things change. We back a lot of emerging managers, and the corollary to that is we fire a lot of people too.

Emerging managers had a particularly hard time raising money last year. Has it gotten any easier for them?

It has not, on average. There have been a handful of special situations. An emerging manager today needs an anchor investor now more than ever. A large, brand-name investor who commits early on.

Is that because people are scared that without an anchor, the fund won’t get raised?


Do you think fundraising in 2010 will be flat, or continue to fall?

It will probably be flat. Q4 of 2009 was pretty good, and we’re just starting to see sovereign wealth funds and pension funds under-allocated. They’re realizing the public markets are giving them a gift. Activity there will offset the decrease in allocations from the foundations and endowments. We’ll see an uptick with the sovereign wealth funds and pension funds, but it will be lumpy. There will be fewer firms who hit their target.