2010: The Fundraising

Next year’s fundraising market could be akin to a Hollywood disaster movie, writes Gene Wolfson.

I am not spending too much time worrying about the end of the world predictions for 2012. It’s not the Mayan calendar – as featured in this year’s Hollywood blockbuster – that keeps me up at night; I’m more concerned with the 2010 calendar that exists in the office of every LP and how I get on it.

My private equity firm will be in fundraising mode next year and we, like many others, will join the existing 1,600 or so firms already out on the fundraising trail. If that number isn’t daunting enough, the supply of secondary opportunities and the dreaded “denominator effect” are in cahoots to create an epic disaster scene that rivals any in the movie “2012”.

2012: A walk in the park compared to fundraising in 2010 

So why bother? Why go out and purposely face such treacherous headwinds? 

We’re doing it because it’s the right thing to do. We’ve been actively investing our existing fund and we are continuing to see very compelling investment opportunities. To invest in these opportunities we need to replenish our fund commitments. Private equity fund managers and their investors will not want to be out of the market in what could prove to be a great vintage year.

The managers that deserve the most attention from investors in 2010 are those who have a proven investment strategy that, with a little tweaking, works well throughout the changing economic cycles. Fund investors need to determine which investment strategies will be the most successful in the projected market environment of the next several years and which managers are best able to execute on those strategies. Investors will be extremely discriminating regardless of the name of the manager headlining the PPM.

The reality is that many funds will not get raised next year. Some may simply be victims of the current economic environment and others probably do not deserve to get funded. Fund investors will need to identify which managers have truly sustainable strategies and which had merely been beneficiaries of the credit boom. Managers with weaker or limited track records will have a hard time. It is simply insufficient to be a “top-quartile” performer based on a particular investment space, geography or size of fund. Top-decile funds that can show that their strategy is replicable will hit or exceed their fundraising targets.

Gene Wolfson

The large overhang of capital committed to conventional buyout strategies will likely conspire to suppress returns of the next several buyout vintage years (similar to what happened to venture capital after the dot-com boom). Distressed and secondary investors may face the same problem. Ironically, the next several vintage years may be great for venture capital, even as limited partners are scaling back their commitments to the sector.

Other strategies like growth equity – Catalyst’s strategy – and emerging markets will continue to draw attention for good reason; they are on the right side of big secular trends with loads of target companies and little debt financing required to fuel their growth. Buying growth companies at a reasonable price takes strong discipline in good markets and careful diligence in down markets. The managers that get it right will produce superior returns for their investors.

So while I will not get quite as much attention as “2012” star John Cusack, I’m taking on 2010!

Gene Wolfson is a partner at New York-based growth equity firm Catalyst Investors.