GPs must be patient, get the timing right, and listen to what LPs in the market are saying to turn around a struggling fundraise, according to First Avenue partner Michael Henningsen.
With over 16 years of advisory experience in alternative assets and capital markets, Henningsen says he struggles to think of many fundraises that have gone 100 per cent smoothly.
Those issues can happen at any point during the fundraising period – causing the process to grind to a halt.
Henningsen told AltAssets, “If a GP fails or struggles to raise the desired capital, the issues are not always just performance related. Obviously the performance and track record is critical, but it can be a whole range of issues that actually impacts the ability to raise their next fund.
“Sometimes it’s organisational, so you may have succession issues. There are a lot of the more established GPs, who have been around 15 to 20 years, working through succession issues.”
The more established firms were launched by experienced individuals, but 20 years on those firms are at a point where there has to be a succession plan in place to prevent them from failing.
Henningsen said succession issues are something that a lot of groups are grappling with, but are also linked to the broader investment team.
“Very often funds can struggle because key individuals leave or there is friction within the team, or people don’t agree on where the organisation should be heading, ” he said.
When GPs come back into the market with another fund they often see team turnover occurring, with not all the partners or senior team wanting to commit to at least another five years of investment.
Alongside the performance, track record, personnel and team issues there are also potential issues with, and from, investors, according to Henningsen.
“Sometimes you have a very concentrated investor base and a couple of big investors suddenly run into issues, for example you saw that recently with a lot of the bank captives with the Volcker rule around three years ago.
“That caused huge challenges to a lot of well-established platforms which actually had pretty good track records. Suddenly they were grappling with how they can fund their next fund, when historically they never had to worry about fundraising and just essentially used the balance sheet of a big organisation.”
There has always been a huge range of fund of funds active in the market, but Henningsen notes that over the last five to six years there have been a lot of changes in the fund of funds universe.
As result, GPs that have had very concentrated fund of funds investor bases have really struggled.
“In recent years, funds may have also struggled because investors have fallen out of love with emerging markets a little bit. A lot of institutions are being quite cautious in a sort of ‘risk-off approach’ to emerging markets, though we are seeing improved signs in recent months.
Back in 2009, when growth was anaemic in the US and Europe, a lot of LPs went to China or India. However, fast forward five or six years and there are now some being very cautious. At the same time, the more successful emerging market GPs are still experiencing incredibly quick fundraisings.
“You also have things like strategy changes, where a GP doesn’t stick to what they are going to do, and sometimes they actually do ok in the new strategy, but the investors don’t like it because it is not what they bought into on day one.”
There are even situations where the market can move away from the GP, and suddenly the strategy is not relevant anymore.
“When you think of failing funds people often associate the performance lagging, it’s generally a factor in most situations, but it’s not always the only one.”
How can GPs turn the failing fund around?
He points out that the notion of a failing fund is common and most of the time an agent gets involved is because something needs to be resolved.
“If you are in the market for 12 to 18 months it is highly likely that something is going to come up at some point.”
Having experienced several fund raisings struggling over the years, Henningsen is well placed to know how to get the process back on the right track, but advises that being patient is key.
To resolve some of the potential issues, some GPs consistently use agents as they appreciate that they can help between fundraises and they see the value an agent can bring.
“However, if you have an issue or you think something needs to be resolved with the help of an agent, it is very important to get that advisor in early so you can work together to address the issue.”
While an agent can assist in turning the fundraise around, whether the majority of the issues can be fixed all depends on how far along the fundraising cycle the GP is before they realise there is a problem.
“Obviously the best situation is where you realise you have these issues before you launch the fundraise and you are objective about what you need to get done before you can really go back with cap-in-hand asking for more capital.”
“The GPs that make the mistakes are the ones who rush back too quickly to raise capital. Often there have been changes at the GP and the LPs just want to see it bed down. “
Another consideration high up on Henningsen’s list of importance is to have a good sense of what the LPs are thinking of you as a GP. One of the challenges is that a GP’s perception of themselves can be quite different to what an LP is thinking, and what the market might be generally thinking.
“They (the GP) may have some close LPs who have a positive view of them, but the broader LP base may not share those views.”
If you have not been proactive about managing your own investor relations, the broader market may not have a good view of you or a misinformed view of you.
“Perceptions are one of the hardest things to turn around, it takes time and it is very difficult if you are in a situation where it is mid-fundraise in a tough process to change those perceptions and challenges quickly.”
Then you get the situations where in the middle of the fundraise you suddenly have to deal with something unexpected. “Again it comes down to being realistic”, according to Henningsen.
“You have to listen to LPs. Sometimes GPs make the mistake where they don’t necessarily listen initially to what the LPs are saying. If you go too far into the fundraising and keep pushing the LPs you will get a lot of declines, and of lot of LPs saying they are not going to back you this time around.”
“Changing an LP’s mind in the middle of a fundraise when they have already said no to a commitment is pretty exceptional”.
The last couple of years have seen LPs reduce the number of GP commitments, as they write bigger, but fewer cheques, or they are going direct themselves.
Henningsen agrees this is a big trend, but again the solution relies in timing and being prepared.
“You need to know well ahead of time that your LP base is consolidating their GP relationships so you can start planning for it. The smart GPs are out fundraising consistently, it is not a case of I have fund in the market, its I have three years in between fundraisings and I need to figure out how to use my time to invest a fund, manage a firm, and also spend time with LPs.”
He doesn’t see these concerns as major road blocks for GPs though as for all the LPs that are reducing commitments, there are quite a few new LPs coming into the asset class. “On balance there is still a healthy flow of capital. Where LPs are going direct or cutting down their relationships, they are getting replaced.”
