Everyone wants to know about fundraising right now, so here we interview Alan Pardee, managing partner of Mercury Capital Advisors, the global placement agent that was set up in 2009 by former members of Merrill Lynch Private Equity Funds Group.
PERE: Your firm raises capital for buyout firms, real estate, venture, mezzanine and distressed asset investing. What is the latest on fundraising in those areas?
Alan Pardee: Well, the concern I had coming into the fall was that we might end up in a sort of ‘permanent summer’ for the rest of the year. But the good news is that investment committees are taking decisions and closings are taking place. Limited partners did take a pause but they have returned to the market place.
PERE: In terms of regions, are there any differences?
AP: There are some countries out there where limited partners are not active, namely the ones in Europe that we are reading about every day. There is still enough activity in Asia particularly, in Australia. Coming back to Europe, there are parts that are active such as Scandinavia and The Netherlands and certainly a fair portion of North America, particularly, among the public pension plans, is relatively active.
PERE: How about emerging markets?
AP: I was just in Sao Paulo. There you have growth activity, capital, and opportunity. There is a fair amount going on. We are raising capital for funds based in Brazil as well as finding capital from Latin America to put into funds.
The fund model which has been so much written about, and one that some people said had died is alive and well. It is more focussed on operators to be sure, more local situations, but investors are back in the opportunistic end.
Alan Pardee on demand for oppo funds
PERE: Turning specifically to real estate now, what are investors looking for?
AP: When we were dealing with the worst of the downturn, it seemed like many limited partners were focussed on hard assets and Asia. Within real estate, while the market has been going up and down, what we are certainly seeing is focus on core real estate, attractive assets with a low risk and low leverage. That’s not news, because that has been around for a while. The pricing for those assets has now got people nervous, so they are beginning to move further out on the risk, return spectrum. That is good news. The fund model which has been so much written about, and one that some people said had died is alive and well. It is more focussed on operators to be sure, more local situations, but investors are back in the opportunistic end, and value added. Joint venture investing is definitely active as well, which comes from the idea of focusing away from funds, but you have a real market again for opportunistic blind pool investing.
PERE: Where in the US is the capital heading?
AP: Within the US, it is particularly focussed on the gateway cities, east and west coast. We have had successful fundraisings that particularly involve those regions becoming oversubscribed. We are now able to say that funds aren’t just meeting their target, but also exceeding it with over subscription.
PERE: Have larger LPs played a part in that?
AP: As the market turned more positively than where we were at the bottom, large investors became active again first. We saw this particularly in our fund raising for Vornado, which became what it was designed to be, a club of large investors globally, with investors who committed between $50 million and $200 million, each of whom were motivated to invest with one of the most capable partners in real estate anywhere. Following that success, mid-sized and smaller LPs also returned to the marketplace globally and Madison International, for whom we were raising capital, was able to exceed its cover and ultimately increase its hard cap from $475 million to $510 million. Oversubscribed funds were certainly not the norm in 2009. We were pleased to have them return in 2011.
PERE: We see that despite the obvious growth angle, fundraising in Asia has been tough for many. Are you seeing demand for the region?
AP: We are seeing a fair amount of demand for real estate in Asia, although less so for Japan, but more so for Greater China and elsewhere. We actually think there is a turning point at the moment wit there being a focus again on Japan, but most of it is certainly pointed towards the China growth opportunity.
PERE: You mentioned demand in Brazil in terms of all asset classes, but what are you seeing in terms of real estate specifically?
AP: There is interest in real estate in Brazil. We are seeing demand coming from North America as you might expect, Europe as you might expect, but from Asia as well. In some corners of the Middle East we are also seeing it.
PERE: Europe is perhaps the stickiest region for fundraising, would you agree?
AP: In Europe, it is very much market-focussed. The places that we read in the newspapers every day about are not in vogue yet. At the moment, there is a fair amount of waiting. There is money on the sidelines, but it wants to wait to see if this is the inflection point or whether we are going to be reading about more changes.
PERE: Turning to fund terms, what changes have you seen in fees?
AP: In 2009, when people were saying that the fund model was broken, there was more variability in the outcome on terms. Management fees were compressed or applied only to invested capital. Catch ups were eliminated or slowed down. Today, the fund model is back and most of the economic terms have settled down roughly where they were before the downturn began. Management fees are generally still the same. Catch ups exist, if a little slower. One change is that there has been a proliferation of two-tiered preferred return and carry structures, particularly in the US.
PERE: And on governance?
AP: Terms related to governance have definitely tightened as LPs believe that if the LPs had more control or more of a voice than they did as the world started to go badly, outcomes may have been different. Where ever there was an LP vote to take, the threshold has moved in favor of the LPs. The Advisory Committees of funds now have more teeth and more oversight than was the case before. On balance, these items, I believe, are a positive for LPs and are rational for funds to give.
PERE: Finally, how would you sum up the current fundraising environment across the asset classes?
AP: It is not a robust or wild market, but it is a functioning one. It is still tricky out there but capital is getting raised. There are also people that are still on the sidelines. Generally speaking people have capital to deploy. They may be nervous about deploying it, but we are not where we were in 2008 and 2009 when capital was so constrained. There may be in some places a lack of conviction, that is a different thing, but there is enough capital out there to have a functioning market. Would that we had stability, we would have more investment decisions being made. The euro crisis has created a pause among LPs in Europe, with others watching the environment carefully while continuing to invest.