Long-time GP skips new fund amid heavy competition

One long-time firm is forgoing raising a new flagship fund in the highly competitive environment — a signal that some GPs may skip the rigors of raising capital in the crowded market in favor of tapping a network of close investors for specific deals.

Sterling Partners Chairman Steven Taslitz told limited partners the firm will move to a deal-by-deal model instead of raising a flagship Fund V. Taslitz, in a Jan. 31 letter to LPs, cited “increasing competition weighing on returns, heightened regulatory and tax friction and less flexibility to operate in what we believe to be the most prudent manner.”

As part of the changes, two managing directors will spin out and form their own healthcare-focused firm, according to the LP letter. Subscribers can read the full story here.

It’s interesting that Sterling Partners attributes its decision to not raise another flagship fund to a changing environment — one in which returns are being compressed. (This is the official explanation, of course.)

GPs have been softening up LPs for a lower-return reality in recent vintages that have operated in a high-priced environment. This is a theme we’ve heard about for some time and expect to continue through this year, barring a downturn.

The high-priced environment, combined with near-record levels of fundraising, makes LPs and their consultants nervous. Andrea Auerbach, Cambridge Associates’ global head of private investment research, said last year she had had some awkward conversations with fundraising GPs touting return targets of 2x or 2.5x and 20 or 25 percent internal rate of return. The median return for all U.S. PE deals in 2014 was estimated at that time at about 10 percent gross, Cambridge found.

“We use this to have fairly meaningful discussions with managers we’re thinking of working with or performing due diligence on,” Auerbach said at the time. “This is the market, not 2x or 2.5x. This was surprising to me. I was … not happy with managers that keep coming in and telling me what their return target is because I know they’re not hitting it.”

Private Equity Editor Chris Witkowsky reflects at home. Photo by Wendy Witkowsky