Target schmarget

Everyone loves to read and talk about other people's fundraising goals. But many of them change along the way, and some offerings disappear altogether. Do initial targets actually matter?  

Judging by the top stories on our website and conversations with people in the industry, everyone loves to read and talk about fundraising targets. Naturally, managers are keen to know what their competitors are up to and who’s aiming to raise how much money. And we’re more than happy to deliver this news to our subscribers. Chasing this type if story is, amongst other things, great fun.

But as we report on fund targets, we cannot help but notice that many of them change along the way, hard caps appear and disappear, and managers close on more or less capital than they had planned to. Others nix funds altogether. So we’ve been wondering about how these targets are set, how they move and whether an initial number is really worth paying attention to.

Fund managers, seeking to build out their businesses, usually target successor funds at larger amounts. Though when doing so, they should think about not just growth, but also whether the targets make sense for the strategy and the timing. Unlike private equity, where well-tenured, sought-after firms manage to raise larger and larger funds in perpetuity, some private debt strategies are too cyclical by nature to make this approach seem like a good idea.

There is a lot of money that’s been raised for distressed debt funds, for example. Though some have recognized the fact that it might take a while to put all that money to work, at least in the US. Absent another market downturn, these managers might have to sit on the sidelines for some time. Some are addressing that by waiving fees on committed capital, as Oaktree is doing on its Opportunities Fund Xb and KKR in its second Special Situations and mezzanine funds.

In other cases, scrapping fundraising plans altogether could also be warranted. It rarely happens and managers might think it’s akin to giving up, but if the investment opportunity just isn’t there, it would be the more LP-friendly approach.

The energy play that was so exciting earlier this year now seems to garner less fanfare, for instance. GSO Capital was reportedly raising two energy funds earlier this year: a $500 million one for public debt and a $1 billion vehicle for private loans to distressed companies. The Blackstone-owned firm now appears to have scrapped the former and be focusing on performing debt with the latter.

Other managers tell PDI that they too are now less inspired by energy, because the window came and went very quickly, and also because betting on oil prices is a tricky game to play in any event.

Sometimes firms raise more than they intended to. GSO was shown in LP documents last year to be raising $2 billion for its European Senior Debt Fund, and later closed it at €2.5 billion ($2.8 billion) in May. Benefit Street Partners’ Private Debt Fund III closed at $1.75 billion a year ago, but was originally shown to have a $500-$750 million target.

Naturally, LPs will flock to firms that have a brand name, good performance and strong fundraising skills. But when they close at higher amounts, industry observers wonder if all the money will find a home, or whether the firms will wind up investing outside of their original mandate. In the case of Benefit Street Partners, the larger fundraise seemed to actually make sense as the third fund was broadening out its scope from just TMT to multiple industries, and investing in growing proportion of sponsorless deals. And GSO, with its own and Blackstone’s connections around the globe, might also be able to find sufficient stuff to do with all the cash at its disposal.

Still, when managers raise funds that are larger or smaller than originally envisioned, they should be prepared to explain these numbers and strategies to their investors. And they not be afraid to rework their fundraising objectives when Plan A no longer makes sense. It’s also a good idea to express targets as ranges, as some firms already do, and to avoid raising more than what the investment opportunity requires, even if it means being able to pocket more in fees.