Life on the road

With private equity fundraising in 2006 likely to break records, the fundraising process is changing. General partners marketing new vehicles are encountering investors who have become more knowledgeable and looking to deploy more capital. By Dave Keating

When it comes to fundraising, private equity fund managers can think of a long list of more pleasant activities they'd rather be engaged in, and it usually includes things like root canal treatment. The basic fact is that raising a fund can be a gruelling, frenetic chore and requires countless hours of travel, due diligence and glad-handing. It's no wonder so many general partners say fundraising is their least favourite part of the job.

However, the task may gradually be getting easier, as more and more investors look to increase their exposure to the asset class. Many GPs say they have noticed a change in the way fundraising is now conducted.

?The LPs are starting to focus in on very sophisticated questions,? says David Donnini, a principal at GTCR Golder Rauner, the Chicago-based mid-market investor which closed its fourth fund at $2.75 billion (€2.2 billion) in early October. ?The questions they ask are getting better.?

For those GPs who come prepared, this is a positive development. But with more and more capital flowing into the asset class, investors are also becoming more selective, which is forcing many firms to make sure they stand out from the crowd with a differentiated profile.

Boom times
One thing most GPs will agree on is that they have seen a tremendous response from investors this year. The fundraising numbers reflect this response. During the first three quarters of 2006, US private equity firms raised $172.2 billion (€137.6 billion), according to figures published by Dow Jones. The amount seems all the more staggering when you consider that in 2005 only $162.5 billion was raised in the entire year. If fundraising continues at this pace, US private equity firms will surpass the record set in 2000 when $179.9 billion was collected. Some estimates have put the likely number for all of 2006 at $225 billion.

?This is a great fundraising environment from a macro sense,? says Donnini. ?People seem to be in a mode of adding to their exposure to this space. Their asset bases are growing, and this combined with a good financial market generally means there's just much more demand for private equity overall.?

GTCR's latest fund surpassed its original target of $2.25 billion, and Donnini says it was clear from the start of the process that the fund was going to be oversubscribed, mostly from previous investors. The firm, which has been in business since 1980, raised 90 percent of their fourth fund from returning LPs.

But it's not just the biggest and longest-established firms that are seeing more interest from LPs during fundraising. Vancouver-based Tricor Pacific Capital, which recently closed its fourth fund at $555 million, also saw its initial target substantially exceeded. All but one of the firm's previous investors signed on for the new fund.

?The climate for fundraising is much better today than it was five or six years ago,? says David Rowntree, managing director of the firm. ?It's much more buoyant than it has been in the past.?

The roadshow
Donnini says once you get to your third or fourth vehicle raised, the fundraising process becomes much easier because there is less travel required. Sometimes, he says, only one face-to-face meeting with an LP is necessary.

?When we launch, we give preference to our existing LPs,? he says. ?We offer to come out and visit them, and almost all of them take us up on face-to-face meetings, and we go through a bit of an update. From there people have varying levels of process. Some people want to come and visit us, some don't. Some do a lot of intensive phone due diligence or another style.?

Cathleen Ellsworth is a managing director with First Reserve, the global energy investment specialist that closed a $7.8 billion energy fund in August. She says even though it was the firm's eleventh fund, there is still extensive travel required for the fundraising process, although it may be compressed into a shorter period of time. First Reserve raised its fund in three months.

?I keep hearing other groups say that they don't travel extensively, but that has not been the case with us,? she adds. ?Whether it's existing clients or new relationships, you want to go out to them and make the effort to see the LPs in their office. We did [our fundraising] in-house with two, two and a half people for a fund of nearly $8 billion dollars in 3 months. I think that is the record for the most fundraising with the least resources in the most compressed time of anyone ever.?

Of course for first-time funds, an extensive dog-andpony show is essential. American Capital Strategies, a publicly-listed buyout firm, just finished raising a $1 billion private equity fund, its first foray into the market. Tom McHale, a senior vice president with the firm, says a long and involved road show is required for a first-time fund. Considering the firm didn't use a placement agent, didn't have a prolonged marketing period and didn't produce a private placement memorandum, the fundraising process was intense.

?We started down the path explaining the transaction we were looking for, what we had to offer, giving background info on American Capital,? he says. ?We started out five months ago but what it rolled into was a two month period of very intensive due diligence, where they were coming out and meeting with all the key members of the management here.?

Ellsworth says a GP should be willing to jump through hoops to get a face-to-face meeting with an investor. She recalls one incidence during her recent campaign where she had to be an extra in a movie just to get to a meeting with the Rhode Island State Treasury.

?They were shooting a movie, the Disney remake of ?Underdog?, at the state capital,? she says. ?There were state troopers and they told us, ?you can't get through.? I said, ?No, you don't understand, we have to be there.? So one of the assistant producers asked me to walk in the background impersonating a businesswoman, and then they would let me through to the treasurer's office. So I got my 15 minutes of fame. Anything for the fund?

Wading through the froth
Across the board, GPs say the biggest concern they are hearing from investors relates to a potential saturation of the market.

?Certainly one of the concerns that a number of the LPs had was the amount of money that is flowing into private equity,? says Tricor's Rowntree. ?They wanted to know what that would translate into in terms of ability to properly invest the money and whether there would be a compression on returns.?

Rowntree says one way he was able to allay those fears was by explaining the difference between Tricor and other, similar groups. He says he emphasised the fact that the firm invests primarily in Western Canada, which he believes is an under-serviced area.

For other firms, however, differentiation may not be enough, given the sheer number of well-funded groups now chasing asset up and down the deal spectrum. One placement agent who helped find LPs for a recently closed first-time fund says another side-effect of the massive increase in private equity investment is that investors are running out of money earlier in the year.

If institutions really are temporarily running out of money, private equity may see fundraising slow down in the fourth quarter. But even if it does, fundraising specialists will still remember 2006 as a remarkable year for private equity.