Outlook 2012: LP predictions

Limited partners will continue to fight for better terms in what will be a more difficult fundraising environment next year, says Hall Capital’s Jessica Reed Saouaf.

Private equity managers will likely have a harder time raising new funds in 2012 than they did in 2011, according to Jessica Reed Saouaf, head of the private equity group at Hall Capital Partners, an advisor to families, endowments and foundations.

“I think 2012 will be a more difficult fundraising environment and I think GPs know that, so those that don’t have to raise next year will probably try to stretch things a little bit longer,” she said.

Because so many funds came to market in 2011, Saouaf is expecting a “modestly slower year” in 2012.

“Some of the stronger firms come back as soon as they’ve committed 70 or 80 percent of their [current] fund, [while] others – particularly those who have not had a significant amount of exits in their most recent fund – are trying to wait as long as they can to try and return capital to LPs before coming back to market,” she said.

Jessica Reed

While many limited partners cut back on re-ups in 2011 in an effort to reduce the number of total partnerships, Saouaf expects the trend to continue next year.

“Whether or not it will accelerate I don’t know, because it’s certainly been a trend that I think really started during the downturn but picked up quite a bit of steam this year as so many funds came back to market,” she said.

Hall Capital commits to roughly 40 active managers in private equity, and the advisory firm is committed to remaining around that number [or fewer], according to Saouaf.

“There’s no magic number, but certainly you could see us at the same [number] or even closer to 30 over time,” she said. “I think that some other LPs are starting out with even more diversified portfolios and trying to get down to 50 or 40 or 30, and I think LPs are still in the early to mid-stages of that evolution.”

While LPs have made “significant progress” in gaining access to more information from GPs, the struggle for more favourable terms will continue into 2012, according to Saouaf, but some details of the limited partner agreement are not likely to change in the near term.

“I think that the 2 and 20 fee structure is pretty solidly in place,” she said. “I don’t happen to think that’s going to change dramatically in the foreseeable future.”

One new development in 2011 was the number of extension requests made by GPs.

“I continue to find it interesting that – both in the realm of fund life extensions and also investment period extensions – LPs have been quite willing to allow GPs to extend, regardless of the specifics of the portfolio and economic arrangement,” Saouaf said. “Within the past few months we’ve seen quite a number of fund life extension requests and in a few cases investment period extension requests and almost all of them go through.”