TORONTO--(BUSINESS WIRE)--Private equity firms around the world are adapting to a “new fundraising road map”, according to the latest Global Private Equity Report from Grant Thornton LLP. Now in its third year, the report is the result of 156 in-depth interviews with senior private equity practitioners in Canada and around the globe1.
The report provides insight into private equity general partners’ expectations on numerous aspects of the fundraising and investment cycle. This year, the report takes a closer look at fundraising and reveals how private equity firms are adapting their approach to increase their chances of a successful fundraise.
As well as assessing the market for private equity fundraising, the Global Private Equity Report delivers an in-depth examination of prospects for deal flow, access to debt finance, exit activity and portfolio company performance drivers.
While the private equity fundraising environment around the world is still seen as challenging, there has been a marked improvement in sentiment across all geographies since last year’s report, with more than half of the executives surveyed (54 percent) having either a positive or neutral outlook. This compares with just a quarter (27 percent) last year. In North America, the percentage of respondents stating the environment is positive more than doubled, up from 20% to 45%.
“The global figures show a brighter view of the fundraising environment across nearly all the major private equity markets in the world, and this supports what we’re seeing anecdotally in Canada, as well,” says Tim Oldfield, Partner, Financial Advisory Services, Grant Thornton LLP in Canada, and one of the contributors to the report. “While slowing economic growth rates and political instability impacts high-growth and emerging markets, we are seeing a trend of a return to core markets like Canada and the US, which are perceived to be more stable and easier to understand.”
Fund structures changing
A majority of General Partners (GPs) around the world (56%) predict an increase in the use of alternative fund structures over the next three years as limited partners explore options beyond the traditional 10-year blind pool fund. The Limited Partnership (LP) has long defined the industry and will continue to remain strong, but the report shows that nearly half (48%) of GPs expect to see an increase in deal-by-deal structures over the next three years—by far the most common alternative. This may be because these can provide certain benefits: a means to tailor programmes to an individual LP’s needs; the ability to adopt a flexible approach to match market circumstances (for GPs to access carry more quickly than through a 10-year fund); and the ability to make investments in areas out of favour with LPs and don’t fit in a blind pool model.
Fundraising: longer, slower, harder
While there is more positivity around fundraising prospects, there is also a recognition among the survey respondents that the process has become more onerous and costly. Many report that the distinction between “fundraising” and “investor relations” has become more blurred. Firms need to be in constant fundraising mode, building and strengthening relationships with investors on an ongoing basis. In addition, GPs are considering alternative incentives to attract new investors. Co-investment opportunities (35%) and advisory board representation (27%) are the two most cited strategies being considered as part of upcoming fundraising.
More than half (53%) of GPs saw a trend in increasing requirements for LP due diligence—information, forward pipeline visibility, LP portfolio visits, and dataroom strategy, for example. Other areas of change include the amount of time it takes to push investors over the line and the need for multiple LP meetings to close the deal. LPs also continue to leverage their increased power to squeeze GPs and ensure their returns are maximized. Research findings show that GPs are reconciled to accepting new demands or offering incentives and concessions (fee discounts, advisory board seats, co-investment rights, etc), encouraging LPs to commit, especially ahead of the important first close.
Around the world, 65 percent of private equity firms expect to be on the fundraising trail within the next 12 months. More firms than ever (22%) expect their funds to be dominated by new LP relationships. The longer established Private Equity markets in the US and Canada show marginally lower levels of churn.
Debt markets opening up
The report’s results highlight that the debt markets appear to be easing, especially in North America where debt multiples are noted to be returning to pre-crisis levels and where respondents have seen a shift from availability being “easy” to “very easy” over the last 12 months.
The wider private equity environment
Globally, the economic environment remains one of the top five challenges facing the PE industry. However, there appears to be signs of growing optimism amongst respondents, suggesting that perhaps we are at the dawn of a new phase of increased activity, especially in the core private equity markets of North America and Western Europe. In North America, 58% of respondents expect an increase in activity, and 72% feel positive or very positive about the outlook for their own portfolio (compared to 61% globally).
“With the continuing improvement in debt markets in Canada and the US and the potential follow on impact this may have globally, as well as signs of positive economic news from Europe and sustained high growth rates across the Asia Pacific region, there appears to be supporting evidence underpinning these early signs of returning confidence, which bodes well for Canadian PE firms. However, there will be stiff competition from the significant increase in US private equity firms seeking Canadian investment opportuntities,” concludes Oldfield.
The Global Private Equity Report is available for download. Tim Oldfield, Partner in Grant Thornton’s Financial Advisory Services, is available for interviews.
About Grant Thornton LLP in Canada
Grant Thornton LLP is a leading Canadian accounting and advisory firm providing audit, tax and advisory services to private and public organizations. We help dynamic organizations unlock their potential for growth by providing meaningful, actionable advice through a broad range of services. Together with the Quebec firm Raymond Chabot Grant Thornton LLP, Grant Thornton in Canada has approximately 4,000 people in offices across Canada. Grant Thornton LLP is a Canadian member of Grant Thornton International Ltd, whose member firms operate in close to 100 countries worldwide.
Follow us on Twitter: @GrantThorntonCA
1 Between July and August 2013, 156 interviews were conducted with top executives from private equity firms. Interviews included a mixture of quantitative and qualitative questions. Arbor Square Associates, an independent research firm, conducted the research. Respondents included general partners in seven principal regions – Europe, North America (USA and Canada), Asia Pacific, Middle East and Africa, India, Latin America and Russia/CIS.