Outlook 2013: Fundraising

Emerging markets, differentiated products and diversified strategies will be firmly on LPs’ radars next year, say Eaton Partners’ Jeff Eaton and Jeff Davis.

It’s not been an easy year for fundraising in the Western world. Many LPs have been trying to reduce their private equity relationships, or reduce their commitments to the alternative assets category, meaning that Europe and America have become increasingly competitive marketplaces for managers seeking to fill up their coffers.

These conditions won’t massively improve next year, according to Jeff Eaton and Jeff Davis, partners at Eaton Partners. “It’s a very competitive marketplace, only the best funds are going to raise money”, said Eaton.

Instead, what’s going to change is the way placement agents, and fund managers, look to cater to the need of LPs.

“We’ve had to be even more opportunistic,” said Davis. “We’ve had to increase our sourcing and origination, so that we could have more to choose from.”

Eaton concurred. “You can have the best sales team in the world, but you really ought to have the best products. We organised our origination efforts to basically have a dedicated team of people focused fully on origination.”

In practice, that has led to a greater variety of products reaching the market. Eaton and David underlined the very unique, topical raises Eaton Partners has completed this year, on top of the more traditional buyout funds: RK Mine Finance Fund II, a $1.15 billion mining fund; Parallel Resource Energy Recapitalization and Restructuring Fund, a $703 million energy fund; Summit Partners Credit Opportunities Fund, a $520 million loan origination fund; and ICG Europe Fund V, a €2.5 billion mid-market mezzanine debt fund.

They expect more of the same momentum next year. This will be helped by a growing, product-focused dialogue with LPs: “If we’re not certain of a product, we’ll do a feeler call program, we’ll call our LPs and say: “Listen, I can’t say the name, but I have a product I could bring to market that looks like this, would this be of interest?” We might call 30 different of our best relationships, for just a moment of their time, to give us a sense that yes, they’re interested. Because the market is so fickle, so hard to predict sometimes, it’s necessary to test the market,” Eaton said.

Real assets, in particular, will be strongly in favour. “There are some people out there who feel that a lot of the easy money that’s been thrown around will increasingly lead to inflation when things turn around, so we’ve seen a lot of interest in inflation-linked assets, natural resources, commodities, agriculture, timber,” said Eaton.

Private equity will continue to be on LPs’ radars, with a demand for big buyout funds coexisting with the search for smaller, more focused vehicles. “In general LPs have moved from the biggest funds, in the last couple of years, trying to take advantage of the hypothesis that smaller funds focusing on smaller deals are less competitive. In theory you can price them cheaper and with better returns,” Eaton explained. “That being said, certain strategies need scale, and there’s always going to be demand for the couple of billion market buyout fund.”

The bigger firms will continue to diversify, Eaton went on. “The funds who have the capabilities to go out and find the best in class team to branch out with a new strategy will continue to do that. There will be demand for those products because a lot of those group have long established relations with those LPs, they already know the institutions and have this level of comfort.”

But some investors will prefer to see sponsors focusing on certain strategies, he said. “The big group, people like Carlyle, Providence, KKR, and Apollo, they’re going to continue to be able to raise money for new strategies, but at the same time you’re going to see smaller groups or more focused groups successfully raise money as well.”

Debt strategies could also do well. “With treasury yields where they are today, if you can find a debt focused strategy that can get mid- to high- teen returns, that looks pretty damn good,” Eaton said.

It will also be a mixed bag when it comes to preferred geographies, Davis said. There will be strong demand for emerging markets, although with the caveat that some of the more established markets are reaching a certain degree of maturity. “There’s still going to be some money raised in China and Brazil, but we definitely have to be selective. Those places are looking pretty crowed pretty quickly,” Eaton said.

Africa was clearly singled out as a rising star. “Africa has become more mainstream. It’s going to take a few years and it’s not going to be like Asia, but we have a fund of funds for Africa, and we’re looking at direct mandates in Africa as well,” Davis said.

But not everybody will be keen to put all its eggs in the emerging basket, he followed. “Europeans really seem to want to play at home, they don’t seem to want to go outside their comfort zone. And when they play at home, they may focus on distress, on special situation products, as opposed to anything growth orientated.”

The Nordics were seen as a bright spot on the continent, where some very good companies held back by problem elsewhere in the eurozone could represent excellent opportunities.