Friday Letter: The power of pace

Cabot Square shouted out to the market this week that it had reached an initial close for its fifth fund at £275 million, with commitments already in place to take it up to its target of £300 million. All this in six months.

The fund has the potential to go to £350 million, its statement said, and having got this far so quickly, it shouldn’t take long for it to sell out completely.

It’s an example of the kind of confident and fast first close that gives comfort to wavering LPs, encourages them to commit and galvanises their decision-making. Around fifteen months is the average time it takes to raise a fund nowadays, and recently there have been some speedy campaigns.

At the beginning of June, Silverfleet Capital closed its second fund at €850 million, outstripping its €700 million target after less than a year in the market. In April, Equistone Partners Europe raced to a €2 billion hard-cap on its fifth fund in just six months. It followed EQT announcing in February a hard-cap on its latest fund, which is still in the market, at €6.75 billion, having exceeded its target of €5.25 billion and attracting double that in commitments.

The polarisation between speedy fund closes and those that seem to drift on forever is crystallised in the often-heard observation that funds get done immediately or not at all. Fundraisings that don’t have significant commitments from credible names to a sizeable percentage of the fund at first close can appear to drop off the radar. They may be downsized, and sometimes (as was the case in April with Doughty Hanson’s ill-fated €2 billion offering) aborted altogether.

LPs are a cautious lot. Incentives, such as concessions on fees and co-investment inducements, only go so far when it comes to turning a ‘maybe’ into a ‘yes’. Institutional investment committees like continuity, familiarity, a track record and increasingly, with healthy distributions needing to be re-invested, to place larger commitments with fewer funds. (To illustrate that last point: Silverfleet’s €850 million of commitments was spread over merely 25 institutional investors, of which more than half were re-ups.)

Equally importantly, no investor has the human resources to consider every deal. It falls to the manager therefore to get their fundraising into the LP calendar early, by positioning themselves as a priority through pre-marketing and ongoing conversations with investors. Employing the skills of a placement agent can also help.

But GPs also know that LPs watch their peers constantly. Many are haunted by a fear of missing out on funds that everyone else wants to back, and they also dread the prospect of going in when nobody else is looking like they are going to follow.

This is why momentum is so all-important. Managers hoping for a fast first close must be ready to generate strong interest right at the start, and that involves a lot of preparation. A fundraiser may only take six months to finish, but the chances are that years of work and preparation have gone into it. For a manager to try and cut corners here wouldn’t just be complacent. It would be downright reckless.