Buyout funds see tougher barriers to entry

BERLIN Thu Feb 28, 2013 1:53pm EST

BERLIN Feb 28 (Reuters) - New private equity fund managers will be hard-pushed to raise funds, as even the most experienced and successful buyout firms find investors have become more selective in the firms they trust with their money.

As private equity fund managers courted potential investors at the industry's annual gathering in Berlin this week, it was clear aspiring managers faced stiff competition from established players, themselves finding fundraising more challenging in the aftermath of the global financial crisis.

"It's really tough for a first-time fund. You need to identify a differentiated strategy, don't come out with something that 100 funds are already doing," Mark Hoeing, a director at Commonfund Capital, a manager of pension fund and endowment money that invests in private equity, told the SuperReturn conference in Berlin.

There are 264 buyout funds seeking a total of $232 billion, up significantly from the 236 funds seeking a total of $181 billion at the start of 2012, market research firm Preqin said.

Such competition leads to private equity investors consolidating their relationships with funds and trying to pick a few winners in any particular strategy rather than placing multiple bets in the same area of the market, Hoeing said.

Even some of the industry's most illustrious firms are feeling the heat.

"It's going to be a tough fundraising for us I'm sure, although people like what we have done and the market looks promising. It's going to be tough for the big funds," Marc St John, head of investor relations at CVC Capital Partners Ltd, told the conference.

CVC, which was founded in 1981 and is seeking 9 billion euros ($11.8 billion) for its latest buyout fund, had a 2008 10.8 billion euro European fund valued at 1.26 times its investors' money and a 2005 6 billion euro European fund valued at 1.75 times their money as of the end of September, according to the Oregon Public Employees Retirement Fund, an investor.

HAVES AND HAVE-NOTS

Five years on from the 2008 financial crisis, a clearer picture is emerging in the minds of investors of fund managers that are capable of delivering returns even through a downturn. Money is piling into such managers at the expense of laggards.

"(Amid fund managers) there is this group of decent performers, but not good, where investors are making a very difficult decision not to re-up (renew commitments) and you see that pressure reflected in the ultimate fund sizes," said Michael Sotirhos, senior investor relations managing director at Blackstone Group LP, the world's largest alternative asset manager.

But even those able to raise funds may end up making less money for themselves as private equity investors demand a break on fees levied to manage and invest money.

"Limited partners (investors) clearly want to see terms that are better than the last fund, they clearly want to see how your fund compares with (other) funds," said Martin Dunnett, managing director of investor relations at Warburg Pincus LLC.

Formed in 1966, Warburg Pincus is fundraising for the largest private equity fund in the market, targeting $12 billion.

Some private equity fund managers may fail not just because of a poor record but because they have failed to stand out in an era of high sophistication, where managers can boast great resources, a targeted strategy or a specific sector niche.

So-called middle-market funds, which typically target smaller deals than the big buyout funds, may be particularly vulnerable if they are generalists and their recipe can be easily replicated.

"There are probably a lot of middle-market buyout funds in the U.S. that won't raise another fund," Commonfund Capital's Hoeing said.

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