Michael Powell: Private equity fundraising in perfect storm

The head of alternative assets for UK pension Universities Superannuation Scheme says portfolio write-downs coupled with the denominator effect have made fundraising tough. Yet many GPs saw this coming, and raised plenty of dry powder ahead of the storm, he says.

How will the global financial crisis affect private equity fundraising over the next 12 months?

Michael Powell, head of alternative assets for the UK's second largest pension, Universities Superannuation Scheme, said:

“I expect the fundraising environment to remain extremely difficult over the coming year – funds will be smaller and fundraising periods longer. A perfect storm has developed with private equity allocations under pressure due to the absence of distributions combined with the denominator impact of collapsing public equity markets. Private equity managers’ unrealised portfolios will continue to suffer due to the difficult economic environment and FASB 157 meaning public equity losses are translated into portfolio write-downs. In such an environment a GP with a significant unrealised fund with escalating NAV write-downs is a tough sell to LPs.

On the plus side, a significant number of GPs within the buyout space saw this coming and accessed the fundraising market before the LP tap was turned off and have plenty of dry powder to see them through the fundraising drought. The GPs whose fundraising cycle was unfortunate enough to miss the 2007 bonanza will struggle over the next 12 months. In this environment, the contrast between high quality GPs will become ever more pronounced and top quality GPs will still be able to access the market to some degree whilst others will be completely frozen out.

There will be one bright spot in the fundraising market and that will be special situations funds, particularly distressed debt funds which are likely to see a plethora of opportunities in the coming year. I expect LP demand for top quality funds in this segment to be extremely strong. Other funds that can fill the capital void will also be in high demand such as mezzanine funds and senior loan funds.”

Powell shared his perspective as part of the upcoming Fundraising Compendium in sister magazine Private Equity International.