The fundraising market for private fund managers is going to be so crowded in 2011 that the largest funds will have to scale back their ambitions, while first-time managers will need to work harder than ever to differentiate themselves.
This was the message delivered by Richard Anthony, head of the Evercore Partners Private Funds Group, the fundraising division of the New York-based investment bank, at a breakfast with reporters Wednesday morning.
“We’re going to have a severely congested fundraising market,” Anthony said, adding: “There will not be enough capital to satisfy all the demand. That’s a certainty”.
“This isn’t a minor thing, really,” Anthony said. “[It’s not] ‘do we reduce our fund size by 10 percent?’ It’s ‘do we halve our fund size’?”
Given the scarcity of capital, Anthony predicted few of the large general partners (GPs) would come out “guns-a-blazing” looking to raise, for example, $7 billion as a follow-on to a $6 billion fund.
“I just don’t think LPs are going to respond very well to that at all,” Anthony said.
I think that LPs are shying away too much from first-time funds
Anthony still believes managers who have a strong record of demonstrated exits will be able to attract capital. He cautioned, though, against managers making exits just for the sake of demonstrating the ability to return capital to limited partners.
Less-established, first-time funds, face a “brutal market” and will need to find ways to differentiate themselves, Anthony said.
“I think this is really the time for sector- and region-specific funds,” he said, adding that the turmoil in the banking sector has also given rise to a number of independent teams offering potential LPs unique strategies, especially in the credit market.
“I think that LPs are shying away too much from first-time funds because … there really is an opportunity with good groups to combine incredibly attractive terms for them to back them and get them up and running,” Anthony said.
We're going to have a severely congested fundraising market
Dana Pawlicki, Evercore’s head of project management in New York, also offered some words of advice for managers who are about to hit the fundraising market.
“It’s never been more important that funds get out there and think globally in their fundraise,” he said, urging investors to go to growth markets like Asia, where more pension and institutional investors are opening their wallets to alternative investments.
Focus on infrastructure
Anthony also didn’t sugarcoat the difficult fundraising environment facing mangers in the infrastructure space, which he described as an emerging asset class that is only going to get more crowded in 2011.
“It’s going to be competitive,” Anthony said. “We’re well aware there’s plenty of groups out here already raising – and some very established ones – but there are some new funds that are going to come to market,” he added, not naming any specific managers.
For infrastructure funds everywhere, “the bid differentiator” in 2011 will be “genuine track records in investing and exiting infrastructure”, Anthony said. “It’s actually quite challenging and I think LPs have got smart to that,” he added.
Infrastructure funds will also “come under much greater scrutiny” during this year’s fundraising cycle than in 2006 or 2007, Anthony said, because LPs have become more educated about the asset class and have learned from their experiences backing managers pre-financial crisis.
“I think they got a little burnt last time around,” Anthony said.