Looking into your LPs

For many private equity firms, high net worth individuals (HNWIs) can bring a lot to the table as investors in their funds, with many such individuals providing GPs with significant resources for input, networks, and support for virtually all aspects of GPs' activities.

And, as a recent report by Capgemini and Merrill Lynch shows, the global population of HNWIs is expected to grow significantly in upcoming years – estimated at six percent per year between 2005 and 2010, and currently standing at 8.7 million people that hold a total of $33.3 trillion (€26.2 trillion) in financial wealth. According to the report, these HNWIs have shown to be very receptive to investing in private equity and hedge funds.

The bottom line is, just as LPs delve thoroughly into the backgrounds of who they invest in, so too should GPs be familiar with much more than the size of LPs' pocketbooks.

At the same time that there is an increase in HNWI investors and their appetite for private equity, so too are private equity firms turning their eyes toward this population of investors, particularly when institutional money proves difficult to chase down. When a delegate to the North American Private Equity Investor Relations and Communications Forum, held in New York by Private Equity International in June, asked how best to attract investors to a first-time fund, more than one IR pro sitting on the panel felt that HNWI investors were a good bet for newer funds or emerging markets-focused funds.

At the same time that there is an increase in HNWI investors and their appetite for private equity, so too are private equity firms turning their eyes toward this population of investors, particularly when institutional money proves difficult to chase down. When a delegate to the North American Private Equity Investor Relations and Communications Forum, held in New York by Private Equity International in June, asked how best to attract investors to a first-time fund, more than one IR pro sitting on the panel felt that HNWI investors were a good bet for newer funds or emerging markets-focused funds.

However, from a risk management perspective, GPs might want to keep in mind that not all HNWI investors – nor relationships between GPs and high net worth individuals – can be measured by the same yardstick. Some HNWI investors might be more prone to filing litigation against the GP, defaulting on fund commitments, or even committing fraud – at least when compared to institutional investors, which tend to have a higher public profile and are subject to stricter regulations, particularly if they manage public money.

For GPs that enjoy longstanding relationships with their HNWI investor base, or for those GPs that have the luxury of only accepting institutional-quality investors into their funds, this issue might not be relevant at all. In the case of EdgeStone Capital Partners, most of the Canadian private equity firm's HNWI investors have been around since the firm's early funds, and while EdgeStone does take on new HNWI investors with each successive fund, these LPs tend to be people that the firm knows well already.

But for first-time funds and for those funds perceived as more ?exotic? (ie, seem riskier to LPs), rounding up capital during a fund raise will likely be a tougher initiative. Consequently, these GPs might be tempted to use more flexibility in how they form their investor base, as well as take on HNWI investors that they have not previously worked with. In such cases, a thorough due diligence effort on the potential LP is crucial. For example, New York-based Conduit Capital Partners had a number of individuals based overseas that invested in the firm's recently closed $382 million Fund III targeting Latin American energy generation projects. According to Scott Swensen, the firm's chairman, these individuals – some of whom were based in the Middle East – were referred by way of Conduit's placement agent.

In addition to having the word of the placement agent, Conduit also used a European bank to help the firm diligence its individual investors based in the Middle East – where Conduit's own network was significantly less extensive than for the region where the firm invests. ?On top of that, I talked to the banker for each of the investors and did my own research on who they are, how long they knew them, to make absolutely sure of who they are,? says Swensen.

The bottom line is, just as LPs delve thoroughly into the backgrounds of who they invest in, so too should GPs be familiar with much more than the size of LPs' pocketbooks.

SAC Capital adds four to private debt capital team
Stamford, Connecticut-based SAC CapitalAdvisors has expanded its private debt capital team with the addition of Petr Marousek, Sarah Jacoby and Paul Gordon as principals, and Corey Magyar as associate. Marousek was previously a vice president with Credit Suisse's financial sponsors group, while Jacoby joins SAC from her previous role as vice president at New York-based private equity firm First Atlantic Capital. Gordon was most recently a senior vice president at New York-based hedge fund Cerberus Capital Management. Magyar, prior to joining SAC, was an analyst within the investment banking group of Merrill Lynch. SAC's private debt capital group was established by Mark Gudis, a former managing director at global investment firm The Blackstone Group, to invest in junior tranches of debt and equity in LBO, recapitalization, and growth financing transactions for public and private companies. With the new hirings, the group now numbers six investment professionals.

Kleinwort Benson rebrands, relocates
UK private bank Kleinwort Benson has undergone a rebranding and restructuring effort that will result in the amalgamation of Kleinwort Benson Private Bank and Kleinwort Benson Channel Islands under the single umbrella brand of Kleinwort Benson. In addition to the restructuring effort, Kleinwort Benson is also expanding its UK regional office network. The rebranding and restructuring follow from the new corporate strategy initiative headed by chief executive Robert Taylor, who joined the bank in November 2004. The bank also recently relocated its London offices to 30 Gresham Street. Kleinwort Benson is a subsidiary of Dresdner Bank AG and affiliated with the Allianz Group.