Poorer-performing private equity firms are increasingly being squeezed out as investors look to partner with the best performers, according to the latest research from private equity placement agent Acanthus Advisers.
Acanthus’ European Mid-Market Fundraising Review 2013 shows that in the past two years, just three per cent of capital raised went to the lowest-tier GPs, as ranked by Acanthus’ proprietary Perception Analysis – down from 13 per cent raised by the same group between 2004 and 2012.
The flight to quality was emphasised further, with top-tier GPs attracting nearly half of all funds raised in 2011-12, up from just a quarter in 2004-12.
In 2012, EUR13.2bn was raised in the European mid-market across 48 funds, not dissimilar from the 2011 figure of EUR14.7bn – and substantially below the 2007 apex of EUR24bn.
Volumes raised in European private equity over the last four years (2009-2012) are only 40 per cent of that raised in the previous four years.
For structural industry specific issues on the LP side, global solvency regulations have substantially impacted the flow of capital into the asset class. In the mid-market, the impact on funds of funds managers is significant, as these managers have historically accounted for the largest share of fund investments (49 per cent of LP commitments into European mid-market funds over 2004-2012 were made by funds of funds)
Competition for capital from the emerging markets remains strong, with many investors reducing the allocation for Europe in favour of increased allocation to Asia and other emerging regions.
Realisations from private equity over the last decade remain very low and until a larger proportion of the money invested is returned, capital providers will be restrained as to future allocations that they can make to the asset class.
Against the backdrop of a languid Western European fundraising market, Turkey saw a record fundraising year with increasing recognition as a major institutional private equity market.
Armando D’Amico, managing partner at Acanthus Advisers, says: “Fundraising in Europe is likely to remain challenging as we progress into 2013, with the levels of cash returned to investors continuing to be low. Until more of this capital is returned to investors, many will remain over-exposed to the asset class and constrained in making new LP commitments. In the meantime, deployment remains slow, with levels of dry powder in the market still relatively high.
“The fundraising road looks set to be very crowded in certain regions over the next couple of years, as many firms that have delayed returning to the market will need to seek fresh capital for survival. The UK and France are expected to be particularly busy markets. LPs are increasingly looking for differentiated but consistent strategies and proof of a manager’s ability to deploy successfully in the current environment and add tangible operational value in their portfolios. Cash back will also remain a major theme, with managers which are effective at generating distributions likely to benefit over those managers with large amounts of unrealised value in their portfolios.”
