Macro volatility has impacted fundraising and created a challenging market for managers across the spectrum. In a roundtable hosted by Real Deals and Crestbridge, a panel of private equity GPs and advisers discussed how to fundraise in a challenging environment.

At the table

George Swirski, Abris Capital Partners
Jason Howard, Headway Capital Partners
Gemma Braithwaite, All Seas Capital
Cheryl Bai, Crestbridge
Edward Ainsworth, Ansor
Alex Di Santo, Crestbridge
Klaus Svendsen, Zetland Capital
Moderated by Kimberly Romaine, Private Equity Communications

What has it been like to fundraise against the extremely challenging backdrop of 2021/22?

Gemma Braithwaite: It was All Seas Capital’s first fundraise and our niche strategy added to that complexity. Rather than explaining our focus when investors asked, “Is it credit? Equity? Special situations?”, and aware that LPs can oscillate between loving one of those strategies for one fund and go off it next time, I aimed to target credit investors. Our target returns are strong in this bucket and offer downside protection, so this position typically works well. We raised through the Covid-19 pandemic and I joined after a cornerstone commitment of $125m.

We got halfway through our raise and I thought it would get easier as the pandemic went away, and face-to-face meetings could replace the impersonal nature of remote contact, which is really hard if you don’t already know the people. I was wrong. Interest rates started to rise, the conflict in Ukraine began, and generally, LPs were less sure about the economic future and, for US investors in particular, about European exposure.

The UK political environment was obviously also somewhat changeable, so there was never a struggle for conversation topics. It took over a year to reach a final close ($400m with co-investments, January 2023) and I had to recreate the final close list a few times, but we were thrilled with raising such a substantial maiden fund and with our roster of quality international investors. In the end, it came down to personal relationships the All Seas founders and I had developed, and these relationships ultimately helped build trust that got people over the line for us as an emerging manager. These investors will be our friends and family forever even if they never give us money again.

Edward Ainsworth: Our investor base is small and targeted, with our six LPs comprised of institutional and specialist fund-of-funds investors seeking interesting vehicles they believe will outperform. Our first fund raised £65m in 2019 and was fully invested by May 2022 into five platforms. We maintained an ongoing dialogue with our investors as we knew there was a big post-pandemic opportunity to invest more into our existing businesses. Our investors were supportive of this approach. We spoke with many other LPs who were interested in our high-performing portfolio, with secondaries players particularly keen on the potential. However, the existing investors themselves wanted to invest so we agreed with them on a top-up fund structure last May. We then expedited a first close before the summer.

What are you seeing in terms of LP preference for funds? Is there an appetite for niche strategies?

Alex Di Santo: We were very busy supporting fund launches in 2021 and saw much of the same in 2022, with a variety of fund sizes and types being launched.
Things have slowed a little and we are seeing a prolonged period from first to final close.

Our clients used to aim to hold about three to five closes but the current environment is forcing managers to hold almost “rolling” closes to secure commitments and get investors over the line. Some specific strategies are popular now, special situations and credit funds are very attractive, and secondaries have a massive place in the current market. GPs are increasingly looking to diversify and pivot their strategy to ensure strong returns in a challenging market. Impact funds are of particular interest, given an under-allocation by some LPs.

Jason Howard: We act both as an LP to emerging managers as well as backing GP-led deals and co-investments. I think secondaries will be the main winner for 2023. We are already seeing some large secondaries funds bucking the market a bit and raising larger funds than before – a clear reflection of the current taste of some LPs. We’re seeing firms that weren’t traditionally in our space coming into the GP-led territory and we’re seeing a lot of LP-led transactions creating liquidity currently lacking in the market to get the cash flowing back to investors. Secondaries will help get the market out of the current trough in 2023. I’m even more optimistic for 2024.

George Swirski: We are an ESG transformation specialist private equity investor and we have had a focus on ESG before it was even a term, since private equity in Central Europe has long been about bringing governance to the region. Absolutely everything needed to be done in the early days of investing there, from restructuring management to reporting structures. So this isn’t new to us at all, but having this ESG structure in place allowed us to put it in a framework where we could progress from remedial work to catching up to Western European standards (where most Central European companies are now), to now becoming leaders of the pack in terms of ESG best practice.

ESG strategies pay off because you get a better multiple when you exit. We sold Graal, a leading canned-fish producer in Poland, in February to Müller Group-backed Lisner Holding, which has hugely demanding standards around its own processing. We’d effectively anticipated that and so had already recorded, incorporated and codified all the elements. It helped the process a lot and proved a real value enhancer as it meant the buyer didn’t need to dedicate resources to bringing Graal up to its own standard.

Buyers have certain requirements, so it’s in our interest to take the momentum we already had from Central Europe’s convergence with Western Europe and maintain it to leapfrog some erstwhile frontrunners to become a leader. This process isn’t ever ‘done’ but is rather an ongoing journey, so we help companies to firmly establish a direction of travel that buyers can see. It’s not a pivot but a natural evolution of what we were doing already.

Klaus Svendsen: Special situations is a term that means something different to everyone. A lot of investors have had bad experiences with special situations, as a lot of big firms have raised large amounts and either not deployed or deployed with mixed results, and even drifted their style. It’s thus crucial to peel the onion to get down to what you really do. How can you deploy? What is the risk or reward? It’s very different to a direct lending vehicle where the conversation is the same for all; it requires a detailed discussion to convey it to investors. A lot of LPs are struggling with bucketing and don’t have a special situations bucket, so we need to spend time communicating. The onus is thus on us to explain what we do extremely succinctly, so we use third-party placement agents as they have the knowledge to convey this effectively.

RD: What is driving the apparent reluctance of LPs in today’s market, and which funds will do well in 2023?

Cheryl Bai: LPs have become more thorough when conducting due diligence when making an investment decision in the face of the current market uncertainty. They want to understand what GP strategies are and how resilient the business models look. It’s taking longer for LPs to understand the market situation and GPs’ place within it, due to additional factors that need to be taken into consideration. However, there is still a lot of dry powder in the institutional community awaiting deployment.

Di Santo: The mega funds will always raise and the mid-market will succeed but currently it needs to work harder to secure not only new relationships but re-ups. These GPs will have more work to do from an investor relations perspective. We spend a lot of time with emerging managers. While general sentiment says they’ll struggle to fundraise, we are seeing some success – first-time funds are taking longer to get over the line but their niche focus and driven management teams will get them there. They may end up with a smaller LP base and/or smaller fund, but it’ll happen. We’re also seeing a lot of deal-by-deal structures doing well.

RD: Is a closed-end fund still the holy grail, or is deal-by-deal more accepted against today’s backdrop?

Ainsworth: We’ve found it’s preferable to have a committed fund, otherwise you spend too much time fundraising. It’s why we switched from deal-by-deal to a fund. That said, it’s challenging to raise funds if you’re not plain vanilla since niche strategies cause lots of questions to be asked, so it was initially tough for us and we felt that innovation outside a traditional structure is not appealing to some LPs. It’s a shame because you have to spend all your time explaining why you’re different, even though it may lead to higher returns. We ended up with a more traditional structure that a broad number of LPs found attractive.

Howard: We are seeing more deal-by-deal and it’s a reflection of the difficulty emerging managers are having in raising money. They’re spending more time and resources they don’t typically have. They often lack a back office or IR team, so founders are going out trying to raise, while sitting on some interesting deals. This dislocation means we can offer specialist capital to emerging managers and often support them with their first deal. We can create a short-term fund to help launch certain emerging managers if they have a good deal but lack the funding.

RD: Will investor breakdowns look different in future, with family offices and retail investors becoming a meaningful part of LP bases?

Swirski: Family offices play a very important role as LPs but there can be challenges around their expectations of GPs and portfolio companies. Over recent years, many have shifted to become direct investors but they can be very different as business owners compared with traditional private equity firms.

Svendsen: I don’t think it’ll change for our segment of small and medium-sized managers. Although some disintermediating disruptors are creating fee-heavy platforms for retail investors, our end of the market doesn’t qualify as we lack a sizeable fund or widely recognisable brand. The real change is that the big global funds will pursue this market for volume because retail can offer them better fees. But retail investors themselves may get the blunt end of the stick.

Braithwaite: Our LP focus will continue to be institutional investors. There will never be a raise where we don’t target a particular geography or type of investor, but ultimately we expect to see the same types of institutions pop up each time rather than wholesale changes from fund to fund. We did consider co-investments to boost primary demand for the fund, but that’s not without its complexities and was quite distracting for the team.

Ainsworth: We only have six investors and one is a family office. I’d prefer to work with organisations that can invest larger cheques in our next fund and therefore we have a limited number of investors. I know all our investors, they can all talk to any of the partners to get regular updates and it’s a plus to having a small group. When we did deal-by-deal we did have retail investors and you end up with a large group of people, with any one of them thinking they’re more important than some of your larger investors – this can be very time-consuming.

Howard: We have a number of smaller investors as a core group and they’re sticky, which pays off in terms of re-ups. I see family offices as a good source of investment as they’re less restrictive, though they’re increasingly setting up private equity houses of their own so a lot of their interest is serving their own future plans as they feel they can cut out the middleman.
I do think we’ll see retail investors become more important over the next five years for some firms. The fees of the aggregators are not sustainable over the longer term, but as tech takes over and we see groups establish marketing platforms and onboarding solutions allowing clients to commit on a cheaper basis, their fee model will be eroded and it’ll create a real opportunity for smaller markets. It can be a low-cost way to source LPs once it matures. We already see some larger firms re-establishing themselves to capture this and it’ll become a lot easier over the next five to 10 years.

Bai: We are seeing smaller managers becoming more openminded towards taking on family offices as LPs, but it’s challenging to get them onboard unless the family office is already very experienced with private equity investing. We often see that it takes longer to get family offices onboarded than institutional investors due to a variety of reasons – even if they get to advanced stages, it’s more complicated and challenging on the legal and due diligence side. Despite this, I expect more GPs to pursue this, owing to the challenges of fundraising nowadays.

Di Santo: Given intense competition and caution from investors, we are seeing GPs having to go above and beyond to accommodate previously unheard of investor terms. We’ve long seen high-net-worths investing into private capital funds directly – into master funds or feeder funds. In a few years’ time, we might see a shift to true retail investors but for now, it’s too early outside of the platforms.

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