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Smaller funds face fierce competition attracting capital

Competition for dollars raised from investors has never been higher with more than 2,200 funds currently seeking to raise an aggregate amount of USD780 billion, according to a report by secondaries adviser and placement agent Cebile Capital.

The average size of funds in the market is declining from USD782 million in 2013, to USD543 million in H1 2015, and almost 80 per cent of US GP's currently fundraising are looking to raise less than USD500 million. In this climate, private equity funds of USD500 million or less in size face numerous challenges raising capital.
The report is based on discussions with over 60 private equity funds and analysis of fundraising data published by fund managers and explores the challenges faced by mid-market funds, and what solutions are available to GPs looking to overcome them.
Competition aside, funds raising less than USD500 million face a number of unique obstacles, according to Cebile Capital. Size alone precludes many potential LPs from being able to invest in smaller funds due to concentration limits, reducing the number of eligible investors. Smaller funds also have fewer resources at their disposal to commit to marketing activities, meaning they take longer to raise, on average, than larger ones.
In order for small GPs to succeed, it is imperative for them to adopt strategies which optimise use of scarce resources by targeting the right LPs, seeking feedback, and making adjustments to implement solutions to problems raised.
Cebile has outlined 18 strategies that lower mid-market private equity funds can follow to make their fund-raising more successful. Among the strategies outlined are:
• The importance of at least six months pre marketing.
• To focus on LPs in the home region but not to ignore those on other continents.  Chances are that there may be less competition for a strategy in another region.
• Hold a first close at a 1/3 of the fund target size.
• Use the secondaries market via staple deals, restructuring or late primaries/early secondaires.

Sunaina Sinha, managing partner of Cebile Capital, says: “We are delighted to release this report, and hope that it provides the information needed by GPs raising mid-market funds.“

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