You know, Dear Reader, that I love talking to limited partners.
First off, the LPs I talk to are generally good peoples, and you don’t always run across good peoples in life.
Secondly, they know a lot of stuff, and they don’t sugarcoat it, spin it, mask it, or otherwise attempt to distort important information about what GPs are doing, which these days usually involves raising larger funds, creating new products or selling minority stakes.
The other day I was talking to one of these folks who has seen something interesting: managers raising capital for funds that they then put on the shelf for six months or even a year before they actually begin investing.
This is not necessarily a new thing; certain managers have done this before. But more firms are now doing it. This seems to be part of the broader trend of managers coming back to market earlier than many LPs scheduled, which screws up an LP’s pipeline planning process, this person said.
But how does a GP get around the contractual threshold mandating that a certain percentage of the prior fund be deployed before the GP raises the next fund? There’s all sorts of neat tricks!
The deployment threshold is “an increasingly fungible number,” my source, who has a great talent for understatement, told me.
The scenario could look like this: a GP approaches an LP and says, ‘look, we’re 40 percent deployed, we’re working on a couple big deals, plus fees and reserves, we’ll be over 75 percent deployed. Therefore, we’re launching the next fund.’
These funds that sit on the shelf aren’t collecting fees, of course. So it’s not really a huge issue, especially if an LP is planning to reinvest in a certain manager anyway. It’s just … well, you know … part of what we observe here in what I like to call Dispatches from the Peak.
And LPs aren’t really bothered by this accelerated schedule. Here at the Peak, when you find a GP who is outperforming, or who has the potential to outperform, or has a team in place who outperformed sometime in the past … well, you don’t want to miss that chance!
Where’s it all leading? There is so much money circulating around the system, or sitting under the metaphorical mattresses, to ensure prices will remain tightly pinned to the high levels they’ve been stuck at for several years.
More products will be spawned, whether firms launching credit pools or tech-growth vehicles or expanding into real estate or whatever. The growing secondaries market will continue to expand and provide a relief valve for investors in illiquid private equity funds who want to see some flow.
It’s all working these days! Humming along, as they say.
Who knows how long it will last, a thought most of us who lived through the explosion of the tech bubble and the melting down of the U.S. economy in 2008 keep secured deep in the back of our brains.
Get the money now is the philosophy, and it’s driving the PE fundraising market into hyperspace.