With so many pension plan sponsors and endowments on the sidelines at the moment, either waiting for year-end portfolio valuation numbers or to see how the economy fares in the months ahead, funds of funds could be one of the few games in town for shops looking to raise a buyout fund in 2009.
To that end, Buyouts checked in with a few F-o-Fs to get the lay of the land and found that, while pledges were still forthcoming, slower paces made sense in some cases. Unsurprisingly, given the uncertain climate, first-time managers can expect a good degree of skepticism, and leeway on terms and conditions was expected.
Abbott Capital Management is plowing ahead with its usual approach. The New York-based fund-of-funds manager commits about $1 billion each year. and it intends to hold to that pace this year, said Charles van Horne, a managing director, at the Buyouts East conference in late March. The firm divides its commitments equally between buyout, growth equity and special situation funds, with 75 percent going to the United States and the rest going to other regions.
Abbott Capital has a program for small and medium-sized buyout funds called Abbot Select Buyout Fund II, a $300 million vehicle used to commit mostly to sub-$1 billion funds. So far it has deployed about $100 million from that fund. Van Horne said Abbott Capital commits to very few first-time funds, but does pledge to second funds. He also said, when asked about whether limited partners now have more power over terms and conditions, “This is when people get religion. In this case, the religion is alignment of interest.” Especially important to him are key-man issues and general partners focusing on their specialties and not engaging in style drift.
Abbott Capital is seeking $1 billion for its sixth fund of funds, Abbott Capital Private Equity Fund VI LP, as reported in an April 2008 issue of Buyouts. It expects to back between 20 and 30 general partners through this vehicle.
Another outlet is Siguler Guff, headquartered in New York, which commits several hundred million per year, according to Kevin Kester, a managing director. Kester runs the Small Buyout Opportunities Fund, a $600 million pool of capital that invests in the funds of buyout firms targeting small and lower mid-market companies. The firm commits $50 million to $150 million per year to that strategy, 70 percent of which goes to funds and the remainder to co-investments. When asked about pledging to emerging managers, Kester said that his firm has done so in the past and will consider it, stating, “We look at everybody.” On the subject of terms and conditions, he said the firm has always gotten good terms, but now is an opportunity to get more creative.
Bill Walsh, managing director of Darien, Conn.-based Portfolio Advisors, said his firm, which raises typically raises a $1 billion fund of funds each year, was very interested in mezzanine and distressed funds. Walsh said the firm expects to put out less than $2 billion this year, versus about $5 billion last year, and that it will commit to one-or-two emerging manager funds in 2009. Regarding terms and conditions, Walsh noted that Portfolio Advisors is negotiating with three firms about lowering their management fees.
A pullback was also in order for Massachusetts-based Grove Street Advisors, which creates customized investment programs for its clients. Barry Gonder, a managing partner, said the firm’s normal commitment pace is $700 million per year, but this year it will be about $400 million, mostly in must-have funds where they could lose their seat at the table if they don’t pledge. He noted the firm will commit more to debt strategies and energy, but overall it’s being more cautious. The best chance for an emerging manager is to be a spin-out team, preferably from either a top-tier manager teaming up with some serial entrepeneurs, or else a top-decile manager striking out on their own.
As for terms and conditions, Gonder said the firm drives a hard bargain. “We push very hard on the economic terms.” Grove Street Advisors avoids committing to mega-funds; most of their GPs are smaller funds that don’t make much on management fees, said Gonder. At the moment, he’s looking closely at key man provisions and GP contributions and indemnifications. He also especially likes no-fault clauses.