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Fundraising Is Down But Not Dead – New LPs Emerge

Yesterday’s preliminary Q1 fundraising numbers show a massive drop from last year’s first quarter: $99.71 billion a year ago. Just $17.24 billion today.

That’s a big hit but, as we’ve outlined before, funds somehow continue to get raised. In other words, fundraising is not dead.

An article in today’s Financial Times hinted at that idea: “Two-thirds of investors are sitting on the sidelines and most are selling, not buying,” said Antoine Dréan, chief executive of Triago, which advises private equity groups on fundraising. “General partners are having to look for new sources of capital.”

What are these new sources of capital? How are “the haves” (e.g. Huntsman Gay, Siguler Guff, Brazos, Lovell Minnick) finding investors, while the majority of fundraisers—the “have nots”—are failing? I called Antione Drean to find out.

He offered me a slightly sunnier outlook than some of the struggling GPs I’ve spoken with. Granted, that is partly his job as a placement agent. But he seems to be finding the money, as he had a few ideas about who is still making commitments to funds.

The new sources of capital are investors that only recently launched private equity practices. In particular, there are a lot of Middle East investors that manage so much money that their new PE allocations can be anywhere from $5 billion to $20 billion, he said. “Most of it, if not all, has not been put to work,” he said.

There are plenty of Asian and a few European investors with new alternative allocations. However, “it is more difficult to get in, and it takes longer,” he said. They take their time evaluating funds, he said, and are very cautious, especially after some sovereign wealth funds took high profile losses in equity investments in mega-firms (See: CIC and Blackstone).

When they do commit, the “young” LPs are investing in “anything that makes sense today,” Drean said. He noted that what makes sense today has changed drastically from what made sense just two years ago. “They’re shying away from financial engineers and looking at specialists, turnaround groups, smaller funds, and other strategies that don’t rely on credit only, Drean said. “Some of the most attractive GPs from two years ago are now headaches.” He added, “It’s still possible to raise money, but you have to target specific industries.”

The largest decline in private equity investment has come from US investors, which he attributed to the denominator effect. “People just don’t have the capacity even if they believe in the asset class. Such is the case with the mature programs.”

It echoes a recent Buyouts feature called “New LPs Breathe Life Into Fundraising Market.” The article mentions that beyond large Middle Eastern and Asian entities, smaller university endowments in the U.S. are launching new programs. Those cited in the article include:

  • Public Employees’ Retirement System of Mississippi
  • Maine Public Employees Retirement System
  • Kentucky Retirement Systems
  • Tennessee Consolidated Retirement System
  • Libyan Investment Authority
  • Government Pension Fund of Thailand
  • Norwegian Petroleum Fund
  • Lehigh University
  • But the most interesting observation Drean had was that, even though the year-over-year drop of 82.7% looks horrific, it $17 billion is still on par with the average over the last several years. “Investors are just going back to basics. The first quarter total means that there is still money to be raised,” he said.

    The Haves and the Have-Nots: How Are Some Firms Beating The Fundraising Odds, While Others Fail Miserably?
    Buyout Fund-Raising Plummets in Q1
    Why Is Castle Harlan’s Fund Less Than Halfway After 14 Months?