Everyone likes a success story, and this week we got one. Patron Capital announced Wednesday that it had reached its capital-raising target for Patron Capital IV having garnered €880 million, including a €100 million co-investment pool.
The London-based firm should be warmly congratulated, yet there is a danger of going gooey over Patron’s success by extrapolating too far.
The group most at risk from taking too much heart from Patron’s haul are rival managers currently out raising European funds of their own, of which there are more than a dozen. A bit like welcoming a rival’s valuation of an asset in the same town, the temptation is to think that, because Patron raised its target money, it is a comparable that points to success for everyone else. However, instead of a cake walk, it is much more likely that about 100 percent of firms on the road will have to struggle like crazy to achieve a similar feat.
That much is clear from data provided this week by US investment advisor, The Townsend Group, when it said there were some 562 funds in the market globally, but that managers weren’t going to raise all the capital they wanted. “If we fast forward one year, the amount of money raised will probably continue to increase, but I still think investors will be more selective,” said Dan Geuther, an analyst at the firm. “It’ll still be a challenging time for managers to raise capital. The best GPs will rise to the top.”
Even the most successful managers in Europe should take heed of Patron’s experience and view it in the same way as a spectator might watch a champion marathon runner that collapses just a yard past the finish line. Indeed, the amount of hard work Patron had to put in for its fourth fund was exceptional.
Keith Breslauer noted that the firm worked as hard on this vehicle as it did for its very first fund. The number of meetings the team had to attend at the offices of investors, its own offices and on-site visits, was a multiple of previous funds.
Furthermore, almost all the existing LPs that came back did so in smaller sums. In order to achieve its target, Patron ended up with a large number of overall investors – more than 100 in fact.
As many know, Patron has a large community of US university endowments among its existing LP base, which generally have less money for commitments to real estate funds than before the crisis. Some of those also are investing directly these days. Patron was looking at losing about 20 percent of its capital, but it was able to replace that decline with investors doing the reverse – favouring traditional blind-pool funds on the distressed side.
The costs Patron bore to raise this fund also were very large. Because of the number of investors and sheer amount of travel required, expenses clocked up to reach the final close came in over budget by more than €2 million. That is despite video technology, because investors are demanding teams get on a plane and visit them in their offices. This is financially and physically gruelling, of course, but if you don’t bear it, you won’t get to grin about it.
At the same time, Patron is not really like other European opportunistic managers. It has made a virtue of the fact that the firm never borrowed a lot, and its new fund also offers low levels of leverage, which was something in its favour given many investors cannot or do not want much debt. Neither did Patron make any single investment that could destroy its previous fund.
Finally, Patron does have a kind of distinct story to sell in that many of its deals involve buying companies rich in real estate, similar to strategies at GI Partners or Terra Firma. Plus, it is an independent platform, so there is no parent sucking up the economics of a fund – something else LPs dislike.
As Breslauer himself says, it has been “really, really tough” and that is for a firm with many things going for it. Only a fool would think it will be easier for them.