GP Trends 2017/2018 - Investec · “If you are at 1% then you had better have a very good reason why it’s not higher.” In his opinion, as a GP, you “should be at least mortgaging

GP Trends 2017/2018North American

overview

This is intended for investment professionals, and not for retail use.

2 Investec Fund Finance GP Trends Survey 2017/18

Investec Bank plcwww.investec.com/fundfinance

This material is issued by Investec Bank plc (“Investec”). The opinions and views expressed are for information purposes only and are subject to change without notice. They should not be viewed as recommendations or investment, legal, tax, accounting or other advice of any nature and recipients should obtain specific professional advice from their own appropriate professional advisers before embarking on any course of action.

Investec Bank plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered under Financial Services Register reference 172330. Investec Bank plc is registered and incorporated in England and Wales No. 00489604 and has its registered office at 2 Gresham Street, London, EC2V 7QP.

March 2018

3Investec Fund Finance GP Trends Survey 2017/18

ContentsNew world symphony 4

Blockbusting buyout funds 7

Commitment, commitment, commitment 9

Room at the top 10

The next frontier 12

A word of thanks 13

Conclusion 14


New world symphony

Welcome to the North American overview of Investec’s eighth annual GP Trends survey. Recent fundraising data indicates a return to levels of confidence last seen before the financial crisis, but there is something different, this time around – it’s the people calling the shots. After long, successful careers, some of the industry’s best known faces are leaving their roles to spend more time with their families, their pastimes or, in one notable case, interviewing celebrities on Bloomberg TV.

This is an opportunity for those on deck to step up to the plate and knock one into the bleachers – but they will have to face a couple of curve balls along the way. Firstly, buying out a founding partner requires a lot of capital and, secondly, larger funds mean a larger General Partner (GP) commitment, particularly with fund managers under pressure from Limited Partners (LPs) to demonstrate closer alignment. Both of these situations are problems that fund financing can help solve, of course.


Which best describes your level of satisfaction with your career in private equity compared to 12 months ago?

Q

26%

28%

38%

5%

2%

Somewhat more satisfied

About the same

Much more satisfied

Much less satisfied

Somewhat less satisfied


On a scale of 1-5, (where 5 is very confident), how confident are you in your long-term career prospects at your current firm?

Q

About the 102 respondents

More than half of the GPs who participated in the study said that they were happier with their lot now than they had been 12 months ago (figure 1). Indeed, almost three-quarters of participants rated their confidence in their long-term career prospects at their current firm as 4 or 5 out of 5 (figure 2).

To download the full GP Trends report, featuring the views of more than 300 GPs, globally, please visit https://www.investec.com/gptrends

45%

5 (very confident)

1 (not confident)

5%

3

14%33%

4 2

4%

Gender

82%

18%

Male Female

Seniority

21%

39%

40%

Managing Partner Partner

Below Partner level

Experience

39%

39%

15%

7%

30+ years

10-19 years

20-29 years

1-9 years

(Figure 1)

(Figure 2)


Blockbusting buyout funds76% of North American GPs surveyed expect their next fund to be more than 25% larger than the current vehicle (figure 3). This assumes a significant increase in capital flowing to private equity managers. Indeed, almost one fourth of respondents (24%) are anticipating doubling the size of their next fund.

What size will your next fund be, in comparison to your current/previous fund?Q

Twice the size or larger

More than 25% larger

Approximately the same size

Smaller Don’t expect to raise another fund

24% 42% 28%

3% 4%

(Figure 3)


Much as LPs might complain at the increase in size of some funds, it should be remembered that it is LPs who are allowing the GPs to satisfy this ambition. As private equity becomes more mainstream and continues to be a key performance driver for institutional portfolios, it’s inevitable that more cash will be competing for commitments to the top performers.

And this is not just felt at the mega buyout end of the spectrum. As Devin Mathews, Founder and Partner at mid-market technology investor ParkerGale, notes:

“There is a considerable weight of LP money chasing US funds that have performed well. Much of it is backing sector or regional specialists to build out their teams and, given that many of these funds will have been investing fairly modest amounts, it is not surprising to see the fund sizes increase so rapidly.”

Despite the larger targets they will be chasing, GPs still expect to get their funds raised in a reasonable timeframe.

How long do you think it will take you to raise your next fund?Q

First close7.2 months

Final close15 months

John Crocker, Managing Partner at Matinicus, has concerns that some funds are getting too large, significantly affecting the culture:

“Typically, the bigger they get, the lower the return over time. Fundamentally, private equity returns are driven by an entrepreneurial instinct, not bureaucracy.”


Commitment, commitment, commitment… One of the tools for GPs looking to demonstrate better alignment with LPs is the amount they personally commit to the fund, as LPs, themselves. Removing outliers, North American GPs are expecting to commit 3.2% of the fund size to their funds, on average. According to data from Preqin (13 March 2018), the 1,267 North American funds raising capital now are targeting $327bn, which would equate to a GP commitment of more than $10bn.

Joe Topley, Director at Ontario Teachers’ Pension Plan, said:

“If you are at 1% then you had better have a very good reason why it’s not higher.”

In his opinion, as a GP, you “should be at least mortgaging your house.” But he adds:

“You don’t want your GP overleveraged, however, and worrying about his or her personal cash flows rather than focusing on the day job.”

17% of participants in this year’s study said that they expected to access external debt financing in order to fund their portion of the GP commitment, up from just 7% (global, not North American figure), two years ago. Worryingly, 6% of respondents weren’t sure where the money would come from.

How much, as a % of the fund, do you expect your team to commit to your next fund?Q3.3%

Average GP fund committment

Global

3.2%Average GP

fund committment

Nor th America


Room at the top One in four North American GPs expect a key man event at their firm in the next five years, yet only just over half of respondents feel confident that their firm has an adequate succession plan in place. Whilst that sounds a little like poor planning, succession is a delicate issue, as Topley explains:

“Succession is a tough question – you actually don’t want the GP to announce too early that they are going through the succession planning process […] as it will inevitably disappoint those not chosen – who may prefer to leave.”

Do you anticipate a succession-led key man event at your firm in the next 5 years?Q

Yes

25%

Unsure

14%

No

61%


Once the time is right to announce a succession plan, there remains the issue of financing any deal.

Gregg Kantor, Head of Fund Finance, North America at Investec, said:

“A GP looking to finance an exit for a retiring senior team member – maybe the founder – can’t just walk into any bank and secure the capital. These sorts of transactions are multi-layered and it takes a specialist to properly price the risk and find a fair value for the asset. ”

And as GPs look to leverage the power of the brands they have built, there may be additional financing requirement.


The next frontier

Half of North American GPs who took part in the research are ready to expand into new geographic markets in the next two years. A similar proportion is looking to invest in new asset classes and the same number is preparing to provide new products or fund types to their LPs. Nearly a quarter of participants are looking to acquire another GP or a GP’s team and one in seven hopes to buy out shareholders or strategic investors in the GP.

It appears that, financing permitting, the next generation of private equity leaders have ambitions every bit as pioneering as their forerunners. New markets, new asset classes, new products and new firms – the next ten years is going to be an interesting journey.

Which of the following do you anticipate your firm will be exploring in the next 2 years?Q

Expanding into new geographic markets

49%

Mergers or acquisitions of teams or GPs

23%

Investing in new asset classes (e.g. PE moving to

Credit)

48%

Buying out strategic investors / shareholders

into the GP

13%

Providing new products / fund types to LPs (e.g.

fund of funds)

47%

None of the above

13%


A word of thanks:We’re very grateful to the 102 North American private equity professionals who participated in this edition of the GP Trends survey. Thank you all for your considerable contribution.


ConclusionThe findings of our research into the North American GP landscape describe an upbeat industry ready to grasp new opportunities. On the back of last year’s strong fundraising numbers, GPs in the US and Canada are anticipating that they will raise larger funds next time they go to the market and that it won’t take them any longer to do so.

But there are challenges, too.

As private equity’s elder statespeople start to transition out of the industry, the next generation is eager to take over, but will almost always need finance to make this happen. LPs now demand a larger fund commitment from their managers, some of whom will have had less time to create their own personal wealth.

Consequently, there is a real need for innovative financing structures at the fund and personal level. Investec Fund Finance is here to help.

Simon Hamilton Global Head of Investec Fund Finance


About Investec Fund Finance

Investec Fund Finance is a specialist finance provider focused on lending to funds and fund management teams.

We aim to build lifelong relationships with our clients. We offer flexible finance solutions at each stage of the fund cycle, which can enhance returns, maximise the efficiency of the fund’s equity and increase competitiveness in an aggressive market environment.

Innovation is at the heart of our thinking and our global team has the vision and the resources to create unique financing structures for unique financing requirements.

About Investec Fund Solutions

Committing to and making overseas investments can bring unintended FX exposures to a fund. We support clients through identifying and resolving these exposures with our Fund Solutions team.

Our sector experience allows us to tailor nuanced solutions to specific client needs around uncertain exit timings and values. On desk credit, our legal and market knowledge allows us to explore structures that remove the need for cash collateral or regular hedge settlements.

The team was formed in 2017, working in synergy with our Fund Finance team to offer supplementary and complementary solutions on a global basis to fund clients, as well as manager- and investor-level clients.

About the research

Research for this edition of the GP Trends report was conducted in conjunction with MJ Hudson, a leading provider of research and other services to the private equity industry. 292 GPs from across the globe took part in the project, this year, and an additional 11 individuals contributed further insights via longer conversations.

More information on MJ Hudson can be found at www.mjhudson.com.


Contact usTo find out more about our research or about how we can support you, please get in touch.

Simon HamiltonGlobal Head of Fund [email protected]+44 207 597 5249

Gregg KantorHead of Fund Finance: [email protected]+44 207 597 4107

Edoardo LevyFund Finance [email protected]+1 646 557 4957

Alessandra McKellFund Finance [email protected]+1 646 557 4968

GP Trends 2017/2018 - Investec · “If you are at 1% then you had better have a very good reason why it’s not higher.” In his opinion, as a GP, you “should be at least mortgaging

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