When Stirling Square Capital Partners, a London-headquartered mid-market private equity firm, closed its second fund on €375 million last year, one particular element stood out: the GP commitment.
The investment team at the firm accounted for €28 million or 7.5 percent of the fund’s total capital. According to an LP source, if you include commitments from a separate, “associated” vehicle, the management exposure to the fund accounts for more like 15 percent. This is far in excess of what you might expect. The GP commitment to a fund does vary, but will normally sit in the 1 percent to 2.5 percent region depending on the size of fund and the liquid net worth of the partners.
Stirling Square declined to comment on the separate entity that apparently boosts the team’s exposure to the fund, but on the topic of GP commitment, investor relations director Robert Swift said, “Feedback from LPs on our approach has been extremely encouraging and it undoubtedly helped in our fundraising exercise”.
This size of contribution is by no means small change. Being able to demonstrate that the individuals in control of the fund have much to lose as well as gain – they have their own “skin in the game” – is compelling for limited partners. One LP in Stirling Square’s fund said the GP commitment was certainly the deciding factor in his backing the fund. The fact that the firm raised €375 million – 50 percent more than for its predecessor fund – in the fundraising down-market of 2009-2010, suggests that other LPs were also impressed.
We feel that the best place to invest our own money is in our own funds. We know exactly where the money goes.
One European firm to really “go long” on its own funds is Amsterdam-based mid-market player Egeria. The investment team of the firm contributed an eyebrow-raising 20 percent to its most recent fund, which closed towards the end of 2008, heavily over-subscribed, on €500 million.
Caroline Huyskes, a partner with Egeria, said LPs undoubtedly appreciated the large commitment. “The fact that we put most of our own net worth into our own fund shows LPs a good sign of confidence. We feel that the best place to invest our own money is in our own funds. We know exactly where the money goes.”
While the GP commitment to the next Egeria fund may not be quite at the 20 percent level, the team will always make up at least 10 percent, said Huyskes.
For Axcel Partners, a Danish mid-market firm, a hugely successful investment from its third fund prompted it to increase the manager commitment to its latest vehicle to 6 percent from 1 percent. The partial exit which spurred the increased GP commitment was Axcel’s investment in Danish jewellery retailer Pandora, which generated venture-like returns of 30x for the firm and its limited partners.
The phenomenal success of the Pandora exit has made the individuals at Axcel, led by managing partner Christian Frigast, a considerable amount of money. As a result of the partners increasing their individual net worth, the team has increased its own commitment to Fund IV. The fundraising effort is – perhaps unsurprisingly – understood to be progressing well.
As of February this year, the firm raised around DKK3 billion (€402 million; $530 million) – surpassing its target – and is likely to pull in another DKK500 million, said a source with knowledge of the process.
To read more about GP fund commitments and other elements of fund structuring, watch out for the Fund Structures supplement, published alongside PEI’s April edition.